HOLDERS OF RAILROAD 
BONDS AND NOTES 

'THEIR RIGHTS AND RaiEDlES" 



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- - -LOUIS HEFT 



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HOLDERS OF RAILROAD 

BONDS AND NOTES: 

THEIR RIGHTS AND 

REMEDIES 

Treating Particularly of the Re- 
ceivership and of the Reorgan- 
ization of the Road, of the 
Foreclosure of the Mortgage 
and of the other Proceedings 
to Realize on the Security. 



BY 

LOUIS HEFT 

OF THE NEW YORK BAR 



NEW YORK 

E. P. BUTTON & COMPANY 

681 Fifth Avenue 

1916 






Copyright, 1916 
By E. p. DUTTON & COMPANY 



FEB 141916 

©JI,A418835 



TO 

THE MEMORY OF 

MY FATHER 



PREFACE 

It is fairly safe to say that the great majority of 
the holders of railroad bonds and notes never read 
their securities nor the mortgage that secures them. 
It is only when the railroad company, whose securi- 
ties they hold, becomes insolvent or defaults that 
they seek advice as to their rights. Then, quite gen- 
erally, for the first time, they ask for a better under- 
standing of the nature of their securities; of their 
rights as to the other creditors and the property of 
the road; of their probable relations with their trus- 
tee, the receiver, and the reorganization committee. 
The foreclosure and the receivership, that usually 
follow the insolvency of a railroad company, and 
the reorganization of the road, that is invariably 
attempted, present many situations that affect its 
security-holders, of which they should have at least 
a fair understanding. 

Recent governmental investigations have pointed 
clearly to the extreme ignorance of the investing 
public as to their rights as holders of corporation 
securities. It is hoped that the information con- 
tained in these pages may help to a better under- 
standing of the nature of railroad securities and of 



PREFACE 

the rights and remedies they confer on their holders, 
and that such knowledge may help to safeguard 
investments. 

L. H. 
New York, October, 1915. 



LIST OF CHAPTERS 

CHAPTER PAGE 

I Introductory i 

II Rights and Remedies with Relation to the Various 

Kinds of Railroad Bonds and Notes 8 

III Rights and Remedies with Relation to the Mortgage 

or Deed of Trust 56 

IV Rights and Remedies with Relation to the Trustee- 

ship 1 16 

V Rights and Remedies with Relation to Foreclosing 
the Mortgage or Otherwise Realizing on the Se- 
curity 146 

VI Rights and Remedies with Relation to the Receiver- 
ship OF the Railroad Company 187 

VII Rights and Remedies with Relation to the Assets of 
the Insolvent Railroad Company; Rights and 
Priorities of the Other Creditors 227 

VIII Rights and Remedies with Relation to the Reorgan- 
ization of the Railroad Company 335 



vii 



CONTENTS OF EACH CHAPTER 
I 

PAGE 

Introductory i 

Three values of a railroad security — Market value — In- 
trinsic value — Legal value. 

II 

Rights and Remedies with Relation to the Various Kinds of 

Railroad Bonds and Notes 8 

General description of railroad bonds, notes and deben- 
tures; notes and bonds compared; power of railroad com- 
pany to issue same; temporary bonds — Transfer of bonds — 
Difference between bondholders and stockholders — Bond- 
holders are bound by the terms of the bond and mortgage 
— Validity of bonds; over-issue; defective issue; issue in ex- 
cess or abuse of power; issue in violation of law or without 
power; secured by void mortgage — Many kinds of railroad 
bonds; classified generally as to form, security, purpose of 
issue, and mode of retirement; distinctions pointed out — 
Rights of bona fide holders of negotiable bonds or notes — 
Lost or stolen coupon bonds or notes, or coupons — Altered 
or mutilated bonds or notes or coupons — Coupon bonds 
and coupons — How transferred; clear or marked bonds; 
presumption of ownership — Effect on coupons when 
severed from their bonds or notes — Collection of cou- 
pons — Presentation of coupons for payment; dispensing 
with presentation; effect of non-presentation — Effect of 
payment on coupons; cancellation — Overdue coupons; 
effect on bonds — Interest on overdue coupons; at- 
tached and detached; rates of interest allowable — The se- 
curity for the coupons; priorities and preferences — Rights 
of coupon holders as to each other; bona fide holders of 
coupons — Statute of limitations; as to bonds; as to cou- 
pons — Registered bonds; act of registration; effect thereof 
on principal and interest — Transfer of registered bonds; 
converting registered bonds into coupon bonds; payment of 
interest — Registration of coupon bonds as to principal only 
— Registration of both bond and coupons — Interchangeable 
or convertible bonds. 

Ix 



X CONTENTS 

III 

PAGE 

Rights and Remedies with Relation to the Mortgage or 

Deed of Trust 56 

Purpose of the mortgage or deed of trust — General de- 
scription of the mortgage — Power of railroad company to 
mortgage its property and its franchise to operate; opinion 
of counsel — The lien that the mortgage gives the bond- 
holders; liens generally discussed — Recording the mort- 
gage — Valid bonds as affected by defective mortgage; 
void bonds as affecting the mortgage — Defective mort- 
gages; partly defective — Synopsis of railroad mortgages — 
(a) Parties to the mortgage; purposes of the mort- 
gage — (b) Consents of stockholders, directors, public 
commissions to the issue and to the mortgage — (c) 
Amount of the issue; limitations; protection against 
over-issue; closed mortgages; open-end mortgages; open 
mortgages — (d) Description of the bonds of the issue- — 
(e) Direct obligations of the railroad (issuing) company; 
stockholders, directors, officers, protected from liability for 
the issue — (f) The property is transferred to the trustee to 
secure the issue, upon certain conditions, etc. — (g) The 
railroad company remains in possession of the mortgaged 
road and other property, except securities, and agrees to 
keep the same in good condition, etc. — (h) Insurance 
against loss by fire, etc. — (i) Description of the mort- 
gaged property — (j) After-acquired property — (k) The 
railroad company agrees to preserve the lien of the mort- 
gage — (1) Execution of all papers necessary to facilitate 
the trust; waiving redemption and exemption laws, etc. — 
(m) The rights, remedies, powers and liability of the 
trustee, etc.; trustee's certificate — (n) Provisions as to pay- 
ment of principal and interest; free from all taxes; gold 
coin — (o) Priorities, if any, between principal and in- 
terest; canceling paid coupons — (p) Sinking fund arrange- 
ments — (q) Redeeming bonds or calling bonds in — (r) 
Payment of serial bonds; bonds issued in series — (s) Re- 
funding plans — (t) Provisions for converting bonds into 
capital stock of the railroad company — (u) Re-possession 
by the railroad company of the road after receivership or 
possession by the trustee — (v) Remedies to enforce thp 
mortgage. 

IV 

Rights and Remedies with Relation to the Trusteeship . 116 
Relation between bondholders and noteholders and their 
trustee generally — Reasons for trusteeship — Who are 
chosen as trustees — Courts hold trustees strictly to their 
duties — Liability of trustee to holders of bonds and notes 
secured by the mortgage; limitation of his liability; acts of 
representatives; losing rights against trustee; liability of 



CONTENTS xi 

PAGE 

trustee to third persons; indemnity to trustee-rHolders of 
bonds and notes are bound by the official acts of their 
trustee — Remedies of holders of bonds and notes against 
their trustee; money damages; injunction; removal; com- 
pelling performance of certain acts — Co-trustees; major- 
it>'; liability of co-trustees for acts of each other; succes- 
sion by continuing trustee — Trustee may not delegate to 
others the powers requiring his individual skill; details 
only may be delegated — Personal interest of the trustee 
in the mortgaged property forbidden when antagonistic 
to holders of the bonds and notes under the mortgage; pur- 
chase of trust property by trustee; remedies of bond and 
note holders; acceptance or rejection; waiving or losing 
remedies against trustee — Litigation is conducted by the 
trustee; holders of bonds and notes are then bound by the 
decisions of the courts; appearance by bondholders; in- 
demnity and demand by a certain proportion of holders; 
when trustee loses right to litigate — Bondholders or note- 
holders may conduct litigation instead of trustee; one or 
more sues for all ; all then bound by decisions of the courts 
— Holders suing on individual holdings; recourse to se- 
curity; provisions barring suits on individual holdings — 
Selection of the trustee; general scope of his powers — 
Duties of the trustee generally; duties before default by 
the railroad company; duties after such default; the reme- 
dies the trustee pursues — Discretion of the trustee in carry- 
ing out the details of the trusteeship — Trustee seeking ad- 
vice of the court; advising with legal counsel; guided by 
the opinion of the holders under the mortgage; rights of 
majority of holders; rights of minority — Removal of 
trustee at option of holders; by the court; for cause — 
Resignation by trustee — Provisions for resignation by trus- 
tee; filling vacancies in the trusteeship — Compensation of 
the trustee; fixed by mortgage or agreement, or the court — 
Expenses of the trusteeship; compensation and expenses 
paid by the railroad company or out of the trust property; 
contribution by holders; expenditures for large or limited 
amounts, or for certain purposes; lien of trustee for com- 
pensation and expenditures. 

V 

Rights and Remedies with Relation to Foreclosing the 
Mortgage or Otherwise Realizing on the Security . 146 

The three usual remedies to realize on the security — 
When the right to commence proceedings accrues; what 
constitutes a default; in interest; in principal — Reasons for 
postponing action by the trustee or the holders — Principal 
may fall due upon default in interest; when it does not; 
option of holders to declare principal due — Default may be 
waived; rights of trustee and of majority of the holders to 



xii CONTENTS 

PAGE 

waive defaults of the railroad company — Redemption of 
mortgaged road by the railroad company and its re-posses- 
sion — Possession and operation of the mortgaged road by 
the trustee; lease of the road; operation optional with 
trustee or holders; rights and liabilities of trustee while 
operating; income during this period; distribution of 
monies received by trustee; his duties while operating the 
road; expenses, contracts, repairs, supplies and help in- 
cidental to operation; contracts of the railroad company as 
aflfecting the trustee; liability of trustee for negligence of 
employees while operating — Trustee selling the mortgaged 
property to satisfy claims under his mortgage; exercise of 
this power may be within the discretion of trustee or con- 
trolled by holders; details of such sale — Foreclosure; out- 
line of procedure — Foreclosure by trustee generally; may 
be controlled by holders; rights of majority of holders and 
of minority; foreclosure by holders instead of trustee — 
When foreclosure sale had — Entire road sold as one in- 
stead of in separate parcels; foreclosure for interest only; 
lease instead of sale; when divisions are separately mort- 
gaged; mortgages on constituent roads of consolidated 
company — Combinations to purchase; reasons therefor; 
combinations of holders under the foreclosed mortgage with 
others; rights of non-participating holders — Persons barred 
from purchasing at the foreclosure sale; persons who may 
purchase — Rights of purchasers; title acquired; the fran- 
chise to operate; a distinction pointed out — Standing of 
purchaser at foreclosure sale — Liability, if any, of pur- 
chaser or new corporation for debts and contracts of the 
railroad company; for mortgages and other liens against 
the property; sale subject to or free of such mortgages or 
other liens; transferring liens to proceeds of sale — Pur- 
chasers as affected by debts, contracts, and certificates of 
the receiver — Effect of foreclosure on claims of general or 
unsecured creditors; on subsequent mortgages and other 
liens; on claims of the holders of the bonds or notes under 
the foreclosed mortgage; on prior mortgages or other 
liens; certain liens having priority; equity of redemption — 
Time and place of foreclosure sale; notice of sale; ad- 
journment — Preventing, stopping or setting aside the sale; 
reasons therefor; losing rights by delay, by participation; 
effect of setting sale aside — Terms of sale; payment of bid 
by holders under the foreclosed mortgage. 

VI 

Rights and Remedies with Relation to the Receivership of 

THE Railroad Company 187 

Receivership generally; outline of management and op- 
eration of road by receiver — Grounds for a receivership ; 
when appointed; default in interest or principal; in- 



CONTENTS xiii 

PAGE 
solvency; inadequate security; when income mortgaged; 
threatened waste of property; application by railroad com- 
pany — Attitude of the courts toward receiverships of rail- 
roads; serving the interests of the public and the holders 
under the mortgage — Appointment is discretionary with the 
court; consent of the parties in interest; bond of the re- 
ceiver — Effect of receivership on existing rights; mort- 
gages or other liens how affected; attaching creditors; 
judgment creditors; suits against the receiver — Ancillary 
receiverships; road running through two or more States; 
appointment of same receiver in each jurisdiction; juris- 
diction of the courts of each State; may appoint their own 
receiver — Receivership of parent road and of branch or 
subsidiary lines — Who is chosen as receiver; consent of 
parties in interest; qualifications of receiver — Receiver 
represents the court; subject only to its control — General 
powers and duties of receiver while operating the road; 
application to the court for instructions and authority; 
what the court generally allows the receiver to do — Dis- 
cretion of the receiver in the management and operation 
of the road — Effect of the contracts of the insolvent road 
on the receiver; leased lines; leases of rolling stock; car 
trust agreements — Expenditures by the receiver — Expendi- 
tures for large amounts or for unusual purposes; making 
unusual contracts — Income during receivership; how ap- 
plied; anticipatmg income — Receiver's certificates; only 
when absolutely necessary, unusual security; lien the court 
gives them; several issues; when payable; rate of inter- 
est; selling price; obligations of the receiver; their form 
and transifer; enforcing their payment; reasons for dis- 
placino- lien of holders of bonds and notes under their 
mortgage; notice to such holders; entitled to be heard — 
Official liability of the receiver; his personal liability — 
Liability of sureties on receiver's bond — Accounting by re- 
ceiver — Removal of the receiver; his resignation — Compen- 
sation of the receiver; fixed by statute or the court; for- 
feiting compensation ; paid out of property or by contribu- 
tion — Termination of the receivership. 

VII 

Rights and Remedies with Relation to the Assets of the 
Insolvent Railroad Company; Rights and Priorities 

of the Other Creditors 227 

General rules of distribution of the assets of the insol- 
vent road; mortgages and other liens; secured and un- 
secured creditors — Income earned by the railroad company 
before its default; after default; income earned by the 
receiver — Distribution of income and proceeds of the mort- 
gaged property when trustee takes possession, operates, or 
sells — Creditors of the railroad generally; what is meant 



XIV CONTENTS 

PAGE 

by priority — Creditors on equal footing — Successive mort- 
gages or other liens; waiving priorities — Closed mort- 
gages; open-end mortgages; bonds in series; open mort- 
gages — Numbered bonds — Over-issued bonds or notes — 
Re-issued, exchanged, and substituted bonds or notes- 
New mortgage before all bonds or notes under prior 
mortgage are put out — Operating expenses prior to re- 
ceivership; nature of claims entitled to this preference; six 
months rule ; extent of preference ; reasons therefor ; funds 
affected by the preference — Claims for original construction 
— Mechanics' liens — Attachments and executions against 
property of the road — Preferred stock — Taxes, public as- 
sessments, governmental charges — Purchase money mort- 
gages; conditional sales — Right of way claims — Judgments 
— Claims and judgments for injuries to persons or prop- 
erty — Priorities among interest coupons and claims for in- 
terest; between principal and interest — Notes; debentures 
or unsecured bonds — First lien bonds— First mortgage 
bonds; first mortgage trust bonds; first mortgage con- 
solidated bonds; second, third, etc., mortgage bonds — Uni- 
fication; general mortgage bonds; blanket mortgage bonds 
— Underlying liens — Refunding mortgage bonds — Bonds re- 
sulting from consolidation, merger, lease or control of 
property or stock of subsidiary companies — Collateral 
trust bonds; collateral trust notes; convertible collateral 
trust bonds or notes; participating or profit sharing bonds 
or notes; three plans for issuing collateral trust bonds — 
Bonds or notes of consolidated roads; of the constituent 
roads; Divisional bonds — Guaranteed bonds or notes — 
Stamped bonds — Assumed bonds — Terminal bonds — ^Bonds 
relating to development; development bonds — Extension 
bonds — Bonds to construction company — Car trust cer- 
tificates or bonds — Equipment trust certificates or bonds — 
Equipment bonds — Bonds growing out of the reorganiza- 
tion or readjustment of the railroad company generally — 
Assented bonds — Prior lien bonds; preferential bonds — 
Extended bonds or notes — Scaling — Income bonds; deben- 
ture income bonds; mortgage income bonds; non-cumula- 
tive income bonds; cumulative income bonds; assented in- 
come bonds. 

VIII 

Rights and Remedies with Relation to the Reorganization 

OF the Railroad Company 335 

Different forms of reorganizations; new charter; sale or 
lease of property; consolidation or merger; assessment of 
stockholders; bondholders waiving lien and accepting new 
securities; scaling; new management — Outline of pro- 
cedure in reorganization — Attitude of courts toward re- 
organizations ; proposed reorganization must be fair — 



CONTENTS XV 

PAGE 

Rights of bondholders, generally, to participate in the 
reorganization; to receive notice and an opportunity to 
examine proposed agreement for reorganization — Rights of 
bondholders who do not join in the reorganization; rights 
upon withdrawal from agreement or abandonment of re- 
organization; reorganization of majority against objections 
of minority; provisions in mortgage empowering majority; 
interest of minority protected by courts — Bondholders may 
reorganize alone; or with other creditors or with stock- 
holders, or both; interests of unsecured creditors pro- 
tected; rights of stockholders of insolvent company; terms 
upon which they may acquire rights in new company — 
Synopsis of reorganization agreement — Becoming a party to 
the agreement; by signing; by deposit of securities; limita- 
tion of period; extension of period; penalty — Use of de- 
posited bonds; how bonds deposited — Certificate of deposit; 
its transfer; its negotiability; rights of transferor and 
transferee; interest on bonds represented by certificates of 
deposit — Synopsis of the plan for reorganization — Filing 
the plan; giving notice thereof; reasonable opportunity to 
examine it; proposed changes; remedies when committee 
fails to file plan or give proper notice — How plan is for- 
mulated and submitted; when contained in agreement; dis- 
cretion of committee to adopt plan ; submitting plan for as- 
sent or dissent; expressing assent or dissent; amount neces- 
sary to approve or reject; written assents or dissents; ma- 
jority and minority rights on approval or rejection of plan 
— When plan takes effect; abandoning plan after adoption 
— Changes in the agreement or the plan; power of com- 
mittee to make changes; uncontrolled power; limited to cer- 
tain matters; material changes; submitting changes to par- 
ties; unauthorized changes; ratification or rejection; rati- 
fication by majority; changes by majority against objection 
of minority; provisions for majority control — Powers of 
committee defined by agreement; discretionary powers; 
positive instructions — Committee may employ representa- 
tives — Committee may construe, remedy, change, prepare, 
adopt, declare operative, abandon plan — Allowing parties 
to join in the reorganization; co-operation with other 
committees — Power of the committee over deposited bonds 
— Pursuing the remedies of the bondholders — Committee 
may acquire property; its powers with respect to same — 
Expenditures and debts by committee; expenses; may con- 
sent to receiver's certificates — Personnel of the committee — 
Individual interest of the committee — Duties of the com- 
mittee; good faith; will of the majority; accounting; time 
within which to complete reorganization ; five years' pro- 
vision — Personal liability of the committee; money dam- 
ages; injunction; compelling performance of duties; declar- 
ing acts void; errors of judgment; limitation of liability; 



xvi CONTENTS 

PAGE 

■who affected by limitation ; liability to third persons ; 
liability for acts of co-members ; accounting and discharge 
— Purchase of property of insolvent road by bondholders or 
committee; using bonds in payment; payment of costs in 
cash; how bid paid when purchased by others; committee 
using own money; failure to complete purchase; deficiency 
on resale — Parties to the agreement are bound by all 
proper acts of the committee; rule when committee acts 
wrongfully; ratification of unauthorized acts; remedies for 
wrongful acts — Parties to the agreement are bound by its 
terms; must deposit bonds; must pay share of expenses, 
etc.; when such expenses are not paid; parties avoiding 
liability under agreement; abandonment — Withdrawing 
from agreement; surrendering certificates; payment of ex- 
penses and charges; return of securities; limitation of 
time — Termination of the agreement; by completing reor- 
ganization; committee may terminate: court may declare 
agreement abandoned; rights of parties when agreement 
and proceedings terminated by the court or the committee — 
Expenses of reorganization; charged against deposited se- 
curities; payment as condition of right to receive securi- 
ties of the new corporation— The new corporation ; distinct 
legal body from old corporation; succeeding to franchises; 
name of new corporation ; distinction between franchises to 
operate the road and franchise to exist as a corporation — 
New corporation bound to issue stock, bonds, etc., accord- 
ing to plan or agreement for reorganization; rights of par- 
ties to securities of new corporation; when such securities 
must issue; five years' provision; voting trust — New cor- 
poration may take property free from all liens against it; 
may take same subject to such liens, or some of them; 
other debts and contracts of the old corporation — New cor- 
poration not liable for contracts or debts of the receiver; 
exceptions. 



HOLDERS OF RAILROAD BONDS 

AND NOTES : THEIR RIGHTS 

AND REMEDIES 

CHAPTER I 

INTRODUCTORY 

Three values of a railroad security. 

Generally speaking, a railroad security may be 
said to have three values. It has a market value, 
the price at which it can be bought and sold (prob- 
ably) in the market. It has an intrinsic value, de- 
pending upon the solvency of the issuing company 
and the property or security behind it. It has a legal 
value, founded upon the rights and remedies its own- 
ership confers to enforce its payment and which en- 
titles it by reason of its legal lien or standing to be 
paid out of certain property of the road or out of all 
its property, as the case may be, before other credi- 
tors or other classes of creditors receive anything. 

Market value. 

The market value of a railroad security does not 
depend always upon its actual, intrinsic value alone, 



•2 RAILROAD BONDS AND NOTES 

i. e., upon the property and its foreclosure value, 
pledged as security, and the other liens, prior and 
junior, against such property; but it is affected, quite 
often, and sometimes quite materially, by extraneous 
influences, among them the temper of the times ; the 
state of the money market; the quoted price; whether 
or not it has a broad and ready market and is a legal 
investment for trust funds or savings banks ; its form, 
whether easy of negotiation and how quickly it can 
be converted into cash; when it matures; its rate of 
interest and the income it produces at the price; 
whether or not it is listed on the stock exchanges ; the 
personnel of the board of directors of the railroad 
company; the prevalent reports, true or false, of the 
state of the finances and affairs of the road ; the effect 
of recent legislation or expected legislation; recent 
decisions of the higher courts ; pending litigation that 
affects the road; events and reports of political sig- 
nificance, local, state, national or international. 

Intrinsic value. 

To determine the intrinsic value of a railroad se- 
curity, inquiry is directed by experts to the credit and 
standing of the issuing company; the condition of 
its finances ; the nature of its franchises ; the property 
mortgaged as security and its physical condition; 
what the prior and later liens against this property 
are; the company's entire property generally; the 
contracts and leases by which the road is bound or has 



INTRODUCTORY 3 

the advantage of; what the entire outstanding bonded 
indebtedness of the company is and how it is secured ; 
whether the bonded indebtedness of the issuing com- 
pany is in excess of the actual or foreclosure value of 
the road as near as it can be judged; whether the 
proportion of the bonded indebtedness to the capital 
stock of the road is proper; the topography of the 
country over which the road is laid; the geographical 
position of the road and whether it commands a 
strategic position; whether it serves a needed pur- 
pose; its future prospects; whether the territory and 
termini served can be reasonably expected to main- 
tain the road; whether the population in the territory 
and points served is increasing or decreasing; the 
character of the traffic, whether it is limited to cer- 
tain industries or is general and diversified; what 
rival lines are in competition; whether the road is 
likely to be absorbed by a larger one and the possi- 
bility of its securities being made valueless upon the 
market before the absorption; the personal character 
and efficiency of the company's management ; its poli- 
cies; its aggressiveness or conservativeness ; whether 
or not the business of the road is being conducted 
along conservative lines ; whether or not those in con- 
trol have other interests that conflict with the best 
interests of the company ; the amount of business the 
road is doing; its permanent earning power; the pro- 
portion that the capitalization of the road per mile 
bears to the earning capacity per mile; whether the 



4 RAILROAD BONDS AND NOTES 

gross earnings have been maintained from year to 
year; whether the ratio of the operating expenses per 
mile is reasonably proportioned to the gross earnings 
per mile and that this proportion has been maintained 
from year to year; that the fixed charges are for 
proper purposes and are kept to the minimum and are 
not out of proportion to the gross earnings; and in 
addition such other matters as the particular issue 
under consideration calls for. 

The average investor has neither the opportunity 
to get at these facts nor the experience in the various 
branches of expert knowledge necessary to under- 
stand or judge them. These matters should be and 
are examined into by financial and engineering ex- 
perts upon whose opinion the bankers depend when 
underwriting or purchasing an issue, and it is upon 
the recommendations of the latter as to the intrinsic 
value of the security that the intending investor usu- 
ally and necessarily relies. 

Legal value. 

The legal value of a railroad security is the foun- 
dation of both its market and intrinsic values. For 
its legal rank as a security, its rights to priority in 
payment over the other indebtednesses of the com- 
pany, its form and negotiability, and such special 
rights and privileges that may be peculiar to that 
issue, affect its market value and enter materially 
into a consideration of its intrinsic value. 



INTRODUCTORY 5 

While the railroad company is paying interest 
regularly and there is no apparent reason for concern, 
the legal rights and remedies that the security may 
carry with it are not given much thought. Then the 
price at which it may be bought or sold and the ready 
market that it may have are alone considered. But 
when the railroad company falls into insolvency then 
the safety of tl:ie security is thought of. And in the 
usual struggle among its creditors over its assets, 
those rights that enable the holders of its securities 
to obtain payment in full in preference to or priority 
over other creditors or other classes of creditors be- 
come of prime importance. It is this that constitutes 
the legal value of a railroad security and upon which 
its market and intrinsic values depend. 

In adjusting the affairs of an insolvent railroad 
corporation, the court usually finds itself confronted 
with claims of many kinds and with many classes of 
creditors. In the unraveling of the entangled mesh 
each strand must be given its position. 

Usually it will be found that the insolvent road is 
a system consisting of a number of branch lines 
operated under leases or by subsidiary companies. 
These subsidiary companies are invariably controlled 
by the main or parent company by means of a con- 
trolling interest in their capital stocks or by owner- 
ship of their properties. The financing of these ex- 
tensions, branch, subsidiary, divisional and leased 
lines, and of the main or parent road, results in many 



6 RAILROAD BONDS AND NOTES 

issues of notes and bonds and other forms and kinds 
of securities. And it is not unusual that the insol- 
vency of a railroad will find creditors holding bonds 
secured by underlying liens against all or certain por- 
tions of the property of the road issued by constituent 
companies before consolidation or representing the 
original mortgages upon the road, followed by first, 
second, general, blanket or unified mortgages on the 
entire system; collateral trust bonds issued by the 
parent company and secured by a deposit of the 
stocks and bonds from its own treasury or the securi- 
ties of its subsidiary companies ; also bonds resulting 
from an attempt at readjustment or reorganization, 
such as extended bonds, prior lien bonds, adjustment 
bonds, income bonds, etc.; outstanding notes or 
debentures that are not secured; car trust certificates 
or equipment bonds may cover the rolling stock and 
equipment of the road; terminals may have been 
mortgaged to secure an issue of bonds or notes ; some 
of the creditors may have outstanding attachments 
against the road, or may have reduced their claims 
to judgments; interest on preferred stock may have 
been made a lien on the property of the road or 
some parts of it; certain claims for labor and ma- 
terials may be entitled to preference as operating ex- 
penses or under statutes; claims for injuries to per- 
sons or property caused in the operation of the road 
before the receivership may be given a preference by 
the statutes of some of the States; mechanics' liens 



INTRODUCTORY 7 

may be charged against t±ie property of the road 
And, further, should a receiver be appointed he may, 
under order of the court, issue receiver's certificates, 
which may be given a lien prior to and a preference 
over mortgages and other liens then against the prop- 
erty of the road. Also the claims for the expenses 
of the receivership and of the operation of the road 
by him, and the expenses of the trusteeship, and the 
costs and expenses of the litigation are given a pri- 
ority in payment over all the preceding claims. And 
the debts for taxes and other governmental charges 
are usually entitled to a preference over all others. 

The relative rights and standings of these different 
securities and claims, their priorities and preferences, 
and the order in which each shares in the assets of 
the railroad company, constitute their legal values, 
and it is the purpose of these pages to discuss and to 
analyze each security or claim against the road that 
will in any way affect the rights or the remedies of 
the holders of the outstanding bonds and notes, and 
show the reason for the standing, priority or pref- 
erence accorded it. 



CHAPTER II 

RIGHTS AND REMEDIES WITH RELATION TO THE 
VARIOUS KINDS OF RAILROAD BONDS AND NOTES 

General description of railroad bonds, notes, and 
debentures; bonds and notes compared; 
power of railroad company to issue same; 
temporary bonds. 

A bond of a railroad company may be described, 
generally, as its written obligation to pay a certain 
sum of money, on a specific date, with interest at a 
fixed rate, the interest payable at stated periods. 

Speaking broadly, a railroad bond resembles, in 
its nature, the usual promissory note. The bond is 
more elaborate in form, and more formal in its exe- 
cution; and usually in addition to the elements that 
make up a promissory note, the bond contains terms 
that confer on its holder, or registered owner, certain 
special rights and remedies, and reserve in the rail- 
road company making the issue certain special 
privileges. What these special rights, remedies, and 
privileges are depend upon the kind of bond in 
question, to which discussion will be directed later. 

A railroad company, when it is necessary for 
proper corporate purposes, may borrow money and 



VARIOUS KINDS OF BONDS AND NOTES 9 

issue bonds as evidences of such indebtedness and of 
its promise to pay. 

It is quite commonly the law in most of the States 
that before a railroad company may issue its bonds 
or stocks, it must first obtain from the public service 
commission having control of the jurisdiction to 
which the railroad company is subject, an order 
authorizing such issue and the amount thereof and 
stating that, in the opinion of such commission, the 
use of the capital to be secured by the issue of such 
stock or bonds is reasonably required for the cor- 
porate purposes of the railroad company. 

When a railroad company issues and sells its 
bonds, it is in effect selling its written promise to 
pay the money it then borrows. Each issue is a 
promise to pay the entire amount authorized; and 
each bond of that issue represents that entire prom- 
ise divided into as many parts as there are bonds. 

A railroad company has power to issue bonds for 
any purpose for which it might lawfully contract a 
debt. This power to issue bonds is regarded as inci- 
dental to the inherent powers of the corporation and 
need not be expressly conferred on it by its charter 
or any statute. But the exercise of this power to 
issue bonds may be limited, restricted or regulated by 
some provision in the charter of the corporation, or a 
statute, or the constitution of the State in which the 
railroad company is incorporated. Bonds issued in 
violation of these limitations, restrictions or regula- 



10 RAILROAD BONDS AND NOTES 

tions are, as a rule, void. Fairly typical of such 
provisions is that which declares that the aggregate 
amount for which a railroad company may issue and 
have bonds outstanding, shall not exceed a specified 
proportion of its capital stock or property. 

Unless restrained by law, a railroad company may 
use any form of security that any other corporation 
or individual might under the same circumstances. 

Railroad bonds are usually made payable at far 
distant dates, so that the money raised by them and 
employed in the building, equipping and improving 
of railroads may have a full opportunity to bring 
forth its fruit. When the rate of interest and the 
market conditions are favorable, the b'onds are for 
long terms ; and, conversely, when the rate of interest 
is high and the market is unfavorable, the issuing 
company will put out notes for a short term, and 
when conditions become more satisfactory, long term 
bonds are issued and the short term notes are taken 
up. 

An issue of railroad notes, like an issue of railroad 
bonds, is the written promise to pay a certain sum 
of money at a specified date, with a fixed rate of in- 
terest. Railroad notes differ from railroad bonds 
only, usually, in the particular pointed out, that they 
are for shorter periods. Railroad notes may be 
issued in coupon form, as bonds may be, and have 
coupons attached to represent the interest. 

Railroad notes are sometimes secured by a mort- 



VARIOUS KINDS OF BONDS AND NOTES ii 

gage on the property of the road, or by a deposit of 
collateral securities, or in any other way that rail- 
road bonds are secured. 

The same rules of law apply to notes as apply to 
bonds and the same situation is presented when 
notes are issued or secured as when bonds are. And 
throughout these pages where reference is made to 
bondholders it is intended to have reference to note- 
holders also, where the issue is of notes and where 
the circumstances are alike except that the instrument 
is a note instead of a bond. 

When a railroad bond is not secured, it is quite 
generally known as a "debenture." To prevent the 
railroad company, by subsequently mortgaging its 
property, from practically disposing of its assets, it 
is usually provided in the agreement pursuant to 
which the debentures are issued that the railroad 
company shall not place any mortgage upon its 
property; in this way while the debentures are not 
secured, they are protected in that the equity in the 
property as it existed at the time of the issue and to 
which they looked for payment will not be taken 
from them by mortgages to secure later issues of 
bonds or other forms of indebtedness. Or provision 
may be made to the effect that should the railroad 
company place any later mortgage upon its property 
that such debentures shall be included in such later 
mortgage and be secured by it.^ 

1 The term "debenture" is used in the English speaking nations 



12 RAILROAD BONDS AND NOTES 

Until the bonds can be engraved, the railroad 
company usually executes and delivers temporary 
bonds, which are either printed or lithographed, and 
are substantially of the tenor of the engraved or per- 
manent bonds. Each temporary bond bears upon 
its face the statement that it is a temporary bond and 
is exchangeable for a like principal amount of en- 
graved bonds. Temporary bonds must be authenti- 
cated by the trustee's certificate in the same manner 
as the permanent or engraved bonds. When the 
temporary bond is exchanged for the engraved bond, 
it is cancelled by the trustee ; and until so exchanged, 
the temporary bond confers on its holder all the 
rights that the engraved bond does. 

to designate instruments widely different in their characteristics. 
In the financial circles of the United States, it is used to convey 
the idea of an unsecured bond. It is also applied here to cer- 
tificates given by the collector of the ports of entry for moneys 
due by the United States Government to importers for drawback 
of duties on merchandise. In some of the governmental depart- 
ments, the term is employed to designate bonds or bills by which 
the government is charged to pay money due on the auditing of 
accounts. 

The term "debenture" is used throughout Great Britain and 
her colonies to designate the bond obligations of municipalities. 

In England the term is used to designate the bonds of munici- 
pal and other corporations; and it also is the name applied to 
custom house, exchequer, and other governmental obligations. It 
is chiefly employed there to designate an instrument issued by a 
corporation which creates or acknowledges a debt and usually, 
though not necessarily, charges the property and undertaking of 
the issuing company. 

In Canada while the obligations of municipalities are also re- 
ferred to as debentures, they are more particularly designated 
"municipal debentures." It seems to be the custom there to refer 
to bonds of municipalities as "municipal debentures" and the bonds 
of other corporations as "bonds." 



VARIOUS KINDS OF BONDS AND NOTES 13 

It is invariably provided in railroad mortgages 
that the bonds under it shall be signed by such per- 
sons as shall, at the time of such signing, be the presi- 
dent or the vice-president of the issuing company, 
and that the corporate seal of the company shall be 
affixed and that it shall be attested by such person as 
shall, at such time, be the secretary or an assistant 
secretary; and that the coupons shall be authenti- 
cated by the engraved signature of the present treas- 
urer, or of any future treasurer, of the issuing com- 
pany. And, it is invariably further provided that, 
should any of such bonds have been signed and 
sealed by the officers of the issuing railroad company, 
and thereafter such persons shall cease to be such 
officers, such bonds may be delivered to the trustee 
to be certified to and put out by him, or returned to 
the railroad company to be put out by it, as the case 
may be, with the same effect as if such persons had 
not ceased to be such officers of the issuing railroad 
company. 

Transfer of bonds. 

The bond may be payable to bearer or to the 
order of a designated payee. 

When payable to bearer, the bond is transferred 
by its delivery from hand to hand, without any 
writing. When payable to the order of a designated 
payee, the bond must be transferred in writing. 

When the bond is issued with the space reserved 



14 RAILROAD BONDS AND NOTES 

for the name of the payee left blank, any holder has 
the legal right to fill in his own name as payee. 
While the holder has the legal right to do this, the 
filling in of his name as payee in the blank space 
may affect its commercial value. It is then a 
"marked bond," the expression used in financial cir- 
cles, and no longer accepted as a "good delivery." 

With the space for the name of the payee left 
blank, the bond is regarded as payable to bearer and 
transferred by its mere manual delivery; when the 
name of the holder has been filled in the space re- 
served, the bond becomes payable to his order and is 
then transferrable only by his written assignment. 

A registered bond is one that bears the name of 
its payee on its face, and is registered in the name of 
such payee on the books of the railroad company, or 
the fiscal agency designated for that purpose. It is 
transferred by written assignment or power, in a 
form approved by the railroad company. Some 
bonds have the form printed on their backs. The 
bond and assignment are delivered to the new owner, 
who then presents them to the railroad company or 
the fiscal agency, as the case may be, and the name of 
such new owner is then registered on the books of the 
company and a notation made on the bond signifying 
its registration, or a new bond may be issued with the 
name of the new owner on its face as payee. See 
Registered bonds; act of registration^ etc. Page 48. 
See also Transfer of registered honds^ etc. Page 50. 



VARIOUS KINDS OF BONDS AND NOTES 15 

Difference between bondholders and stockholders. 

As the bond is the written promise of the railroad 
company to pay to the one entitled thereto, accord- 
ing to its terms, the holder of such bond is a creditor 
of the issuing railroad company. 

The bondholders are creditors of the railroad com- 
pany; the stockholders are members of the company 
that owes the money to the bondholders. The bond- 
holders are entitled to demand payment of their 
bonds and interest of the railroad company; the 
stockholders are members of the company that must 
pay the bondholders. 

When the assets of a railroad company are finally 
distributed upon a winding up of its affairs, the bond- 
holders and the other creditors are first paid in full, 
according to their respective priorities, before the 
stockholders receive anything. Stockholders are en- 
titled to their shares of the assets of the corporation 
only after all the creditors, of every kind, have been 
paid in full. 

Bondholders, like other creditors, ordinarily, do 
not have the power to vote at any of the corporate 
meetings. Stockholders do have this right. In 
some instances, though rarely, the power to vote is 
given to bondholders, either by the terms of the mort- 
gage or by the statute laws of the State. 

The bondholders receive a fixed rate of interest on 
their bonds, which is a fixed charge or expense of the 
railroad company; the stockholders (of common 



le RAILROAD BONDS AND NOTES 

stock) receive dividends on their stock dependent 
upon the condition of affairs of the company and as 
the board of directors shall declare them. The 
holder of the preferred stock is paid his stipulated 
rate of dividend only after the interest on the bonded 
indebtedness and all the annual fixed charges are 
paid. He is in the same position with relation to 
the bondholder as is the holder of the common stock, 
though his dividend is payable before that of the 
latter and sometimes his interest in the assets of 
the corporation has priority over that of the holder 
of common stock. 

Bondholders are bound by the terms of the bond 
and mortgage; the contract between the par- 
ties. 

The bondholder is bound by all the terms and pro- 
visions and conditions contained in his bond. He is 
chargeable with notice of all the facts that appear 
on its face or are endorsed on it. He is chargeable 
also with notice of all the terms, conditions, and 
provisions contained in the mortgage when the bond 
refers to the mortgage with sufficient directness to 
apprise him of its existence. The provisions of the 
mortgage, by such reference, become part of the 
bond with the same effect as if there set forth at 
length. 

The bond and the mortgage constitute the contract 
between the bondholder, the railroad company, and 



VARIOUS KINDS OF BONDS AND NOTES 17 

the trustee. And like all contracts its provisions are 
binding on all the parties to it. It is in the con- 
struction that the courts put on the language used in 
these two documents, that the rights and remedies 
of the bondholders are to be found. The courts, in 
construing the language of the bond and the mort- 
gage, are controlled by statute laws, the general 
precedents, and by the principles that apply partic- 
ularly to railroad property and which govern the 
peculiar relations that exist between the bondholders 
and the trustee and the railroad company; all of 
which is read into and form part of the bond and 
mortgage. These statute laws, general precedents, 
and particular principles will be presented and dis- 
cussed, throughout these pages, under the appropri- 
ate headings. 

The legal residence of a railroad company is the 
State under the laws of which it is created ; and it is 
the law of that State that governs the construction of 
the contract of the parties. 

Each bondholder is bound by the terms of this 
contract; and each is entitled to its protection. And 
neither the trustee, nor any reorganization com- 
mittee, nor any majority of the bondholders, can de- 
prive him of any of his rights by making any change 
in the terms of the bond or the mortgage, or by 
waiving any default by the railroad company under 
them, unless the bondholder has agreed and con- 
sented that they have such power. This power to 



i8 RAILROAD BONDS AND NOTES 

bind all the bondholders of an issue by the acts of a 
majority or of the trustee, may be conferred by the 
terms of the mortgage, or by the statute law of the 
State which, as was seen, forms part of the bond and 
the mortgage. 

In case of a conflict between the terms of the bond 
and the mortgage, those of the bond will prevail ; for 
the bond is the written evidence of the indebtedness, 
while the mortgage is the instrument merely that in- 
sures the payment of such indebtedness. The bond 
is the basic document: the mortgage depends on the 
bond for existence. There may be a bond without 
a mortgage; there cannot be a mortgage without a 
bond. 

Validity of bonds; over-issue; defective issue; 
issue in excess or abuse of power; issue in 
violation of law, or without power; secured 
by void mortgage. 

Bonds issued by a railroad company in violation 
of its charter, or the constitution of the State, or 
some of its statute laws, or issued without any power, 
are void. 

Railroad bonds that are valid in the State in which 
the railroad company that issued them is incorpor- 
ated, are valid everywhere. Where a road runs 
through two or more States, it must be incorporated 
under the laws of each. And should the bonds be 
valid under the laws of any of these States they are 



VARIOUS KINDS OF BONDS AND NOTES 19 

valid everywhere, even though they might have been 
invalid if issued under the laws of one or more of 
the other States in which the Toad is incorporated. 

Bonds that are part of an over-issue or which have 
been defectively issued or which have been issued in 
excess or abuse of power where some power existed, 
are good in the hands of a bona fide holder, who has 
paid their reasonable value for them, purchased them 
in good faith before maturity, in the regular course 
of business, and without knowledge or notice of any- 
thing wrong. Should the holder of such bonds not 
meet all the requirements of bona fide holdership, 
as just detailed, then such bonds are void in his 
hands. Over-issued or defectively issued bonds, or 
bonds issued in excess or in abuse of power where 
the railroad company had some power to make the 
issue, are good only in the hands of a bona fide 
holder. 

But a distinction is drawn between bonds that are 
over-issued, or issued defectively, or in excess or in 
abuse of a power that it possessed, and those issued in 
violation of law or without any power at all to do so. 

Bonds issued in violation of law or without any 
power are void in the hands of all holders, includ- 
ing bona fide holders. There is, in these latter cases, 
no mere error or abuse of power that the law will 
seek to cure when such bonds have come into the 
hands of innocent bona fide holders; but here is a 
violation of the law that the court cannot condone, 



20 RAILROAD BONDS AND NOTES 

and an absolute absence of power that the court can- 
not supply. However, where the railroad company 
has issued bonds without any power to do so, and 
it has actually received the money for them, the law 
will not permit it to benefit by its own wrong, and 
will then enforce payment of such bonds when held 
by bona fide holders. That is, notwithstanding that 
the railroad company had no power to issue the bonds 
in question, if it actually did, and received the money 
therefor, and they pass into the possession of holders 
who bought such bonds in good faith, before ma- 
turity in the regular course of business, and paid 
for them their reasonable value, and without knowl- 
edge or notice that anything was wrong, then the 
company must pay such bonds to holders answering 
all these requirements. 

Bonds otherwise good are not affected by the fact 
that they are secured by a mortgage that is void or 
defective. Should the mortgage be void, for any 
reason, the security only fails and the bonds continue 
as theretofore. The bonds are good; the attempt to 
secure them has failed. 

Many kinds of railroad bonds; classified generally 
as to form, security, purpose of issue, and 
mode of retirement, satisfaction, or exchange ; 
distinctions pointed out. 

There are many kinds of railroad bonds. The 
mortgages, too, that secure them vary in their terms. 



VARIOUS KINDS OF BONDS AND NOTES 21 

It is doubtful if any two issues are exactly alike. 
However, they fall quite generally into classes that 
are basicly similar, differing only with respect to 
some special agreement or stipulation. 

The names used to designate issues of railroad 
bonds suggest, in a general way, these special agree- 
ments or stipulations that characterize an issue. 

In attempting to classify railroad bonds, they may 
be divided into those relating to their form^ such as 
coupon bonds, registered bonds, with the privilege 
of converting or interchanging them; those relating 
to their security^ such as mortgage bonds of the vari- 
ous ranks, as first, second, etc., general or blanket, 
prior lien, consolidated, terminal, income, collateral 
trust, and those, too, that are not secured such as, 
generally, notes and debentures; those relating to the 
purpose for which they were issued^ as refunding, 
improvement, development, construction, etc., and 
those relating to the mode of satisfaction^ retirement^ 
or exchange^ such as redeemable, callable, refunding, 
those with the privilege of converting into the capi- 
tal stock of the issuing company, those calling for 
payment in gold, those with arrangement for sinking 
fund or serial payment. 

Most railroad bonds contain one or more, if not 
all, of these features that are not inconsistent, such 
as a first mortgage (the security), refunding (the 
purpose), gold (the mode of payment), convertible 
coupon (the form) bonds. 



22 RAILROAD BONDS AND NOTES 

The rights and remedies of a holder of a bond con- 
taining one or more of the different features dis- 
cussed (form, security, purpose of issue, and mode 
of satisfaction, payment or retirement), are a com- 
bination of all the rights and remedies that each 
confers.^ 

If these names are accurately used, they will give 
in a general way an idea of the standing and of the 
nature of the security; but one should not depend on 
the name alone, as without any intention to deceive, 
the name "first mortgage," for instance, may be used, 
which, while giving the intending bondholder the im- 
pression that it is entirely a "first" mortgage, may be a 
first mortgage only upon a small portion of the prop- 
erty pledged as security, and an inferior lien upon the 
balance. Again, the term "first" may be used to des- 
ignate it as the first of its kind that has been issued, 
without regard to the nature of the security, such as 
"first consolidated" mortgage bonds, which may be 
secured by a first mortgage upon the entire mortgaged 
property, so far as the consolidated company that is- 
sued that mortgage is concerned, but which is a mort- 
gage subject, secondary, junior and inferior, to all the 
mortgages and other liens that attached to the prop- 
erty before the consolidation took place. See Bonds 

1 The right to priority in payment in the distribution of the 
assets of the insolvent road under each of the many forms and 
kinds of railroad securities are discussed in Chapter VII. Rights 
and Remedies ivith Relation to the Assets of the Insolvent Rail- 
road Company; Rights of the Other Creditors. 



VARIOUS KINDS OF BONDS AND NOTES 23 

or notes of consolidated roads; of the constituent 
roads. Page 286. Underlying liens. Page 27 1 . 

Rights of bona fide holders of negotiable bonds. 

In the broad sense of the term, and as commer- 
cially understood, a railroad bond is negotiable when 
it is in such form that it may be transferred from 
hand to hand by delivery or assignment in blank. 
But a bond may be negotiable in that respect and 
may not be negotiable in the strict legal sense that it 
is here employed. 

The purpose for discussing this phase of the form 
of railroad bonds, is that when a bond that is nego- 
tiable in the strict legal meaning of that term is 
held by a bona fide holder, the law grants such bona 
fide holder of such an instrument certain immunities 
and rights not ordinarily enjoyed by the holders of 
securities generally. 

When a railroad bond, in the form of a negotiable 
instrument in the strict legal sense just mentioned, is 
held by a bona fide holder, no defense can be set up 
against him, when trying to recover on it, that grew 
out of any of the transactions that any of the pre- 
vious holders may have had between them, or with 
the railroad company; nor can any defense then be 
set up that will defeat or diminish his claim, except 
such as deny the very existence and life of the in- 
strument itself. Of these latter defenses forgery and 
lack of delivery of the instrument, are typical; as 



24 RAILROAD BONDS AND NOTES 

where the trustee's certificate has been forged or not 
delivered. But no collateral understandings, or 
agreements, or violations of any contract, that pre- 
vious holders may have had between them or with 
the railroad company, concerning such negotiable 
bond, can affect a bona fide holder. 

As a general rule, bona fide holders are not affected 
by the misconduct of the officers of the railroad com- 
pany in the management of its affairs, or by fraud 
in the issue or the negotiation of the bonds, unless 
they were parties to it. 

If the bond be not in the form of a negotiable 
instrument, as here meant, each successive holder 
merely succeeds to the rights and liabilities of his 
predecessors in ownership, and in this way whatever 
claims might have been set up against any holder or 
owner in the chain of ownership may be set up 
against such present holder or owner. 

In what form must a railroad bond be in order to 
be a negotiable instrument in the legal sense under 
discussion'? The usual railroad bond is in that form 
because it contains the promise of the railroad com- 
pany to pay a certain sum of money, at a certain 
time, to bearer (or to the order of a named payee and 
assigned in blank), free from conditions of any kind. 
The elements necessary to constitute a bond a nego- 
tiable instrument, therefore, and all of which must 
concur are: an unconditional promise to pay a defi- 
nite sum of money, at a definite time, to bearer (or 



VARIOUS KINDS OF BONDS AND NOTES 25 

to the order of a named payee and assigned by him in 
blank). There must be no uncertainty as to the 
amount to be paid, nor as to the time when it shall 
be paid ; the promise to pay must be without any con- 
ditions and must not be dependent upon the hap- 
pening of any event; and the bond must be payable 
to bearer or to the order of a named payee and as- 
signed in blank by the latter. 

By assignment in blank is meant that the name of 
the person to whom the assignment is made is not 
mentioned but the space reserved therefor is left 
blank so that he may pass it on from hand to hand 
without further writing of any kind. 

Experience has shown that ''dry-as-dust" informa- 
tion can be assimilated only by iteration and reitera- 
tion ; therefore, at the risk of wearying the reader, in 
view of its importance, the elements necessary to 
make the bond a negotiable instrument are again 
repeated: the bond must contain an unconditional 
promise to pay a definite sum of money, at a definite 
time, to bearer (or to the order of a named payee and 
assigned in blank by him). There must be neither 
conditions nor uncertainty attached to the promise to 
pay, nor to the time of payment, nor to the amount. 

Where the name of the payee is left blank, the 
law regards it as payable to bearer. 

That the bond is numbered does not affect its ne- 
gotiability; nor does the provision therein contained 
that it may be redeemed or called in, or paid off, in 



26 RAILROAD BONDS AND NOTES 

any way, before maturity. And neither does an 
option to convert the bond into the capital stock of 
the issuing company; nor does a recital in the bond, 
"that it may be registered or made payable only on 
the books of the company," interfere with its nego- 
tiability. 

The interests of the business world call for the aid 
of some medium for the exchange of its values, and 
negotiable railroad bonds meet in many ways this 
requirement. The law, therefore, gives them, so far 
as it can, the quality of negotiability so that, while 
not money, they may pass as the representatives of 
money. A negotiable railroad bond does circulate 
in many transactions upon the same basis as money. 
The law accordingly cloaks a bona fide holder of a 
negotiable bond with the protection which shields 
him, as was just described, so that he may accept and 
use his bond as if it were money itself. This is an 
exception to the general rule of law. The necessities 
of modern commerce have created it. 

However, the principle is not carried beyond the 
business interests that created it. And the negotia- 
bility of the bond and the bona fide holdership must 
both be present, and all the elements that constitute 
each must exist. Therefore, the bond must contain 
an unconditional promise to pay a definite sum of 
money, at a definite time, to bearer (or to the order 
of a named payee and assigned in blank by him) ; 
and the person claiming the rights of a bona fide 



VARIOUS KINDS OF BONDS AND NOTES 27 

holder must have purchased such bond, not directly 
from the railroad company, but in the open market 
in the regular course of business, in good faith, be- 
fore its maturity, without notice or knowledge that 
there was anything wrong with it or of the defenses 
sought to be set up against him, and he must have 
paid therefor its fair and reasonable value. All the 
elements constituting the bond a negotiable instru- 
ment, in the sense here used, and all the elements 
constituting bona fide holdership must be present; 
should any be lacking, notwithstanding the presence 
of all the others, the case does not fall within the 
principles discussed. 

A purchaser in the open market is not bound to 
make a close and critical examination of a bond to 
avoid the charge of bad faith. 

One purchasing a bond in the regular course of 
business is not bound to make inquiries as to the 
rights to sell nor of the title of the one offering it 
for sale, nor to take any special precautionary meas- 
ures to ascertain what hostile claims may exist to 
defeat it. But a deliberate avoidance of knowledge 
or wilful closing of the eyes to facts, when circum- 
stances exist that are likely to arouse suspicion in 
the mind of a reasonably prudent man, will be con- 
strued to have the same effect as if such person actu- 
ally had the knowledge that he so deliberately avoids. 

To be a bona fide holder one need not have paid 
the par value of the bond. He need only pay the 



28 RAILROAD BONDS AND NOTES 

reasonable value of the bond. If he paid much less 
than its value, it is a fact that bears on the question 
of good faith. 

A bona fide holder is entitled to recover the face 
value of his bond no matter what he paid for it. 

Lost or stolen coupon bonds or notes, or coupons. 

If a bond negotiable in form, as just described, be 
lost or stolen, and the finder or thief sell it to one 
who is a bona fide holder, as previously discussed, 
such purchaser takes a good title to it and is entitled 
to the payment of his bond and its interest as against 
every one. 

The bond, however, must be negotiable in form, 
that is, it must be a promise to pay a definite sum of 
money, at a specified date, free from conditions of 
any kind, to bearer or to the order of a named payee 
and assigned in blank. And the purchaser must be 
a bona fide holder, that is, he must have purchased 
his bond before its maturity, in good faith, in the 
usual course of business, that is, in the open market, 
and paid therefor its fair and reasonable value, with- 
out any knowledge or notice that there was anything 
wrong. But the negotiability of the bond and the 
bona fides of the holder must concur. 

Should any of the elements of negotiability be 
missing, then the purchaser from the finder or thief 
does not get a good title to it, notwithstanding that 
all the elements of bona fide holdership are present. 



VARIOUS KINDS OF BONDS AND NOTES 29 

And, notwithstanding that the bond contains all the 
elements necessary to make it a negotiable instru- 
ment, its purchaser from the finder or thief does not 
get a good title should there be lacking any of the 
elements necessary to constitute him a bona fide 
holder. 

The railroad company does not pay to more than 
one party, of course. The loss falls on the one who 
lost the bond or from whom it was stolen. The bona 
fide purchaser from a thief or a finder of a stolen or 
lost negotiable bond gets a good title to it and is 
entitled to payment of all that is due on it, and all 
subsequent holders have the same rights. 

Payment may be refused until the one demanding 
it shows that he is a bona fide holder and that the 
bond is negotiable in form. He is entitled to its 
face value, notwithstanding what he paid; however, 
should he have paid much less than its actual value 
it will have a material bearing on his bona fides. 

In a proper case, the payment of the lost or stolen 
bond may be enforced by the party who lost it or 
from whom it was stolen; and a court of equity, it 
seems, will compel the execution of a duplicate bond 
in its place, upon the party applying therefor furnish- 
ing proper and sufficient indemnity to the railroad 
company to reimburse it should it be called upon to 
pay to a bona fide holder. 

The rules that have been stated here with refer- 
ence to lost or stolen bonds apply also to lost or 



30 RAILROAD BONDS AND NOTES 

stolen notes or detached coupons. When coupons 
are still attached to a bond or note they are incidents 
of the same and are affected by whatever affects such 
bond or note. 

Altered or mutilated bonds, notes or coupons. 

An intentional changing, alteration, or mutilation 
of a railroad bond in any of its material parts makes 
it void when made by its holder or owner or by 
another at his instigation or with his consent. 

If such alteration or mutilation be unintention- 
ally made, though in a material part, it will not affect 
the bond; nor is a bond affected by an alteration or 
a mutilation by a stranger to it, though in a material 
part, when made neither at the instigation nor with 
the consent of its owner or holder. 

An alteration in an immaterial part does not affect 
the bond no matter by whom made, nor under what 
circumstances. 

Should a bond, note or a detached coupon become 
mutilated, the owner may notify the railroad com- 
pany or the trustee, whichever shall have charge of 
putting out the issue, and a duplicate will be issued, 
when a provision to this effect is contained in the 
mortgage. It usually is. 

When a serial number on a bond is altered or 
mutilated, it is not considered as in a material part 
when such number is used merely, as it usually is, 
for the purpose of identification. But when num- 



VARIOUS KINDS OF BONDS AND NOTES 31 

bers are used to create different classes among the 
bonds of an issue, the bonds of one number or series 
of numbers possessing certain rights not given to the 
others, then the numbers enter into and become part 
of the contract contained in the bond and form a 
material part of it. The intentional alteration of 
serial numbers of a bond in such a case by its owner 
or with his consent or privity will annul the bond. 

A purchaser in the open market is not bound to 
make a close and critical examination of a bond to 
avoid the charge of bad faith. 

The same rules that have been stated here with 
reference to altered, changed or mutilated bonds ap- 
ply also to altered, changed or mutilated notes or 
detached coupons. When the coupons are still at- 
tached to a bond or note they are incidents of the 
same and are affected by whatever affects such bond 
or note. 

Coupon bonds and coupons. 

A coupon bond consists of two parts; the bond 
itself, which represents the principal sum due, and 
the coupons which represent the interest thereon. 

The coupon bond may be regarded as an inven- 
tion of modern commerce. They are the result of 
the need in the money market of a security that can 
be circulated and pass from hand to hand without 
any formality of transfer, and as a substitute for 
money to a certain extent. It is because of their 



32 RAILROAD BONDS AND NOTES 

great convenience in the financial world that the 
courts, when possible, will preserve this capacity for 
ready transfer, and give coupon bonds and coupons 
this easy marketability and currency. 

The maturity of railroad bonds is fixed, as a rule, 
at far distant periods, averaging about fifty years. 
A set of certificates, one for each instalment of in- 
terest, from the time the bond is issued until the date 
of its maturity is attached to the bond. At the ex- 
piration of each interest period when the interest 
that the certificate represents becomes due, it is cut 
off and presented at the place designated for pay- 
ment. These certificates may be detached from the 
bond and negotiated. 

The term coupons from the French couper^ to cut, 
has been universally adopted to designate these cer- 
tificates because they are cut off when collected or 
negotiated. 

How transferred; "clear" or "marked" bonds; pre- 
sumption of ownership. 

In its usual form a coupon bond is made payable 
to bearer, or payable to the order of a named payee, 
or the space left for the name of the payee may be 
left blank. 

When the bond is payable to bearer, or the name 
of the payee is left blank, it is transferred from hand 
to hand by mere manual delivery without any writ- 
ing or formality of any kind. 



VARIOUS KINDS OF BONDS AND NOTES 33 

A holder of a bond with the space for the name of 
the payee left blank, has the legal right to fill in his 
own name as payee ; while this is a legal right yet, if 
done, it will effect the bond commercially, for it is 
then a "marked bond," as the expression is used in 
financial circles and will not be accepted in transac- 
tions as a "good delivery," in that condition. It is 
no longer a "clear" bond. 

When the name of the payee appears in the bond 
it can be transferred only by such named payee, who 
must deliver the bond accompanied with his written 
assignment of it. 

The coupon bond that is transferrable by its 
manual delivery only, and which has never been 
registered, is known as a "clear bond," and is ac- 
cepted in all transactions as a "good delivery." It 
should have no writing on it of any kind after it was 
put out. The holder should never deface his bond 
with any writing. Any memorandum may be writ- 
ten on a separate piece of paper and pinned on. 

The law presumes that the transfer of a bond or 
its coupons carries with it the title of ownership. 
Every holder of a coupon bond or of a coupon, pay- 
able to bearer, is presumed to be its owner. This 
presumption, however, is not conclusive and may be 
shown to be otherwise. This presumption of owner- 
ship merely relieves the holder, when suing on his 
bond or coupon, or presenting it for payment, from 
proving his title in the first instance. He is pre- 



34 RAILROAD BONDS AND NOTES 

sumed to be the owner until this is disputed; then 
he must prove his title. 

Effect on coupons when severed from bonds. 

Detached coupons, when negotiable in the strict 
legal sense, as previously discussed, possess to a great 
extent the characteristics of promissory notes. By 
such negotiability is meant that the coupons are pay- 
able to bearer, or to the order of a named payee and 
endorsed in blank by him; and that they contain an 
unconditional promise to pay a definite sum of money 
on a designated date. This is the form in which 
coupons are usually issued. 

Should coupons comply with all these require- 
ments, as they usually do, then when detached from 
their bonds they become independent securities, like 
so many promissory notes. They are then no longer 
mere incidents of their bonds from which they have 
been severed, but each is a separate contract, a dis- 
tinct obligation of the issuing company. They be- 
come so far independent of the bond from which they 
have been detached as to continue their negotiability 
and, if for interest already accrued, remain in full 
force after the bond itself has been called in, re- 
deemed, or for any reason paid or canceled before 
maturity. As to cessation of interest on bond called 
in, see Redeeming bonds; calling bonds in. Page 

98. 

When a negotiable coupon falls due and is not 



VARIOUS KINDS OF BONDS AND NOTES 35 

paid, its holder is entitled to sue and recover on it. 
He may sue on each successive coupon as it falls due 
and is not paid. And the fact that the coupons sued 
upon are from bonds secured by a mortgage does not 
bar the suit; but in realizing on his judgment, the 
holder is not entitled to take any part of the property 
covered by the mortgage. 

While the coupon negotiable in form is a contract 
in itself, separate and independent of the bond, the 
law holds that the recovery on it shall be based upon 
and be in conformity with the obligation contained 
in the bond. 

Should the detached coupon, sought to be sued 
upon separately, be lacking in any of the elements 
of negotiability as previously described, a separate 
action will not lie upon it; it may then only be sued 
upon in connection with the bond from which it was 
severed and of which it is an incident. Some 
coupons do not contain promises to pay the sums 
therein mentioned, but are practically merely re- 
ceipts for such amounts. Such coupons may not be 
sued upon separately, as they then lack the elements, 
so many times discussed, necessar}^ to make them ne- 
gotiable instruments. 

A coupon which is not negotiable in the strict legal 
sense may be sometimes regarded as such, if the bond 
from which it was severed is itself negotiable. But 
on this proposition, the courts of the various States 
have decided differently. In some States, the law 



36 RAILROAD BONDS AND NOTES 

is : that the coupon shall not be regarded as negotia- 
ble when severed, if it is not so itself, notwithstand- 
ing that the bond from which it was severed is 
negotiable, unless some statute makes it so. The 
courts of the other States hold that the coupons shall 
be taken in connection with the bonds from which 
they were severed, and though the coupon itself is 
not negotiable in form, if the bond be so, the coupon 
having acquired and possessed the same character- 
istics as the bond while attached does not lose these 
qualities by being severed, as the coupons are imbued 
with the strength of their bonds. 

Should there be a conflict between the terms of the 
bonds and the coupons the terms of the former will 
prevail. 

Collection of coupons. 

To collect the interest which the coupon repre- 
sents the holder must cut it off when due and present 
it at the place designated for payment. It is usually 
provided in the mortgage or deed of trust, that the 
trustee shall pay the coupons, or that the railroad 
company shall maintain an office or agency at which 
coupons may be presented for payment. Should no 
place be designated, the coupon is properly presented 
at the office of the railroad company. The coupon 
may be presented in person or through the usual 
course of banking, by deposit for collection. When 
the holder of the coupon is at a distance from the 



VARIOUS KINDS OF BONDS AND NOTES 37 

place where it is payable, the usual and better course 
is to place it in the care of his local bank about a week 
before it is due. Institutions of this kind are 
equipped with better facilities for the collection of 
coupons than the private holder. The latter must 
resort either to the registered mail or express com- 
panies to send it to the place of payment. 

To collect a coupon the original bond need not be 
presented. Coupons when negotiable, as previously 
described, become a separate contract and distinct 
obligation of the railroad company, and are paid 
without regard to the ownership of the bond. When 
the coupon is paid the company, or the trustees, who- 
ever pays it is entitled to its possession and it must 
be surrendered, just as a promissory note or other 
commercial paper is turned over and surrendered 
when satisfied. 

Presentation of coupons for payment; dispensing 
with presentation; effect of non-presentation. 

The holder of a coupon does not lose his rights to 
its payment because he has not presented it for that 
purpose at the time when and the place where it is 
payable. The coupon is due and payable on the 
day fixed for its payment, and the obligation of the 
railroad company to pay the coupon is not dis- 
charged until it has actually paid it. 

If the company had the money at the time and 
place designated for payment, the holder, while he 



38 RAILROAD BONDS AND NOTES 

does not lose his right to payment of the coupon, will 
lose the interest on it, for unpaid coupons that have 
been severed from their bonds draw interest from the 
time of their maturity. See Interest on over-due 
coupons. Page 42. If the company had no money 
for the payment of the coupons at the time and place 
specified for payment, the coupons need not have 
been presented and there is no loss of interest on such 
coupon. 

The holder of a coupon has the right without 
prejudice, except as to the possible loss of interest 
on his coupon, to await, without demand, the ma- 
turity of the bond and then collect his principal and 
interest, or at any intermediate tim.e collect the in- 
terest then due. While these are his rights, it may 
be regarded as a rather unbusiness-like practise. 

Effect of payment on coupons; cancellation. 

The payment of a coupon extinguishes it. 

Circumstances that tend to keep them alive as 
obligations of the railroad company should be 
avoided. When paid they should be cancelled. 

There are cases recorded where coupons were taken 
up by third persons interested in the financial condi- 
tion of the railroad company, under an arrangement 
with it by which such third persons advanced the 
necessary money and took up the coupons as they 
matured and held them as continuing obligations of 
the railroad. 



VARIOUS KINDS OF BONDS AND NOTES 39 

The courts have held such a transaction to be a 
payment and an extinguishment of the coupons so 
taken up, so far as the holders of the bonds and the 
other coupons under the mortgage were concerned, 
where they were not parties to such an arrangement; 
but as between the railroad company and such third 
parties, the transaction is regarded as a purchase and 
not as a payment of the coupons so taken up, and 
that such third parties thereby became the owners of 
such coupons and therefore became creditors of the 
railroad company; but they are not then permitted 
recourse to the mortgaged property, and are not al- 
lowed to prove their claims against such property in 
competition with the holders of the bonds and the 
other coupons. 

However, a railroad company may find itself tem- 
porarily embarrassed financially, and to stay legal 
action by holders of unpaid coupons, and prevent a 
foreclosure of the mortgage, it may arrange, with the 
consent of the holders of the bonds and of the later 
maturing coupons, that third parties may take up 
the coupons as they mature, and that the transaction 
shall take the form of a purchase and not be a pay- 
ment of such coupons. Under such an arrangement 
the coupons are kept alive as outstanding obligations 
of the railroad company, and are secured by the 
mortgage and share in the security, the same as if 
in the hands of their original holders. This ar- 
rangement is sometimes provided for in the mortgage 



40 RAILROAD BONDS AND NOTES 

itself, or it may be made upon a collateral consent of 
the holders of the bonds and the subsequently ma- 
turing coupons. And though no specific arrange- 
ment be made to that effect, yet if the holders of the 
bonds and of the subsequently maturing coupons 
have knowledge of such an arrangement between the 
railroad company and such third parties, and the 
surrounding facts and circumstances clearly show 
that it is the intention of all parties concerned that 
such transaction shall be a purchase of the coupons 
by which they are to be kept alive and share in the 
mortgage, the court will enforce such an understand- 
ing in favor of such third parties thus advancing 
these monies, and, accordingly, will permit them to 
share in the security of the mortgage with all the 
rights of holders of such coupons. 

Overdue coupons; effect on bonds. 

When the bond itself is due and not paid it is dis- 
honored and is no longer a negotiable instrument. 
Then each subsequent holder of it takes it subject 
to all defenses and objections that might be set up 
either to defeat or diminish a recovery on it. It will 
be remembered that one of the elements of negotia- 
bility is that the instrument be purchased before 
maturity. 

Whether or not the non-payment of a coupon at- 
tached to the bond will affect its bond not yet due 
with dishonor has been differently decided. And it 



VARIOUS KINDS OF BONDS AND NOTES 41 

is of interest to examine the reasons upon which these 
different views rest. 

The law seems in harmony on the point that when 
the principal of the bond is payable in instalments, 
it becomes dishonored by the failure to pay any one 
instalment. This rule, however, is not generally 
applied to the non-payment of interest and the fail- 
ure to pay the interest-coupon attached to the bond 
does not of itself dishonor the bond. In one juris- 
diction, this view is rejected and no distinction is 
recognized between failure to pay an instalment of 
interest and an instalment of principal. This court 
holds that if interest be over-due and unpaid, and 
this fact appears on the face of the bond as it does 
when the coupons remain attached, it is sufficient to 
put the purchaser on his guard that the bond has been 
dishonored by the non-payment of the coupon, and 
the bond will be then subject to all defenses that 
may defeat or diminish its payment. 

The decisive weight of authority, however, re- 
gards coupon bonds as a class of negotiable securities, 
the principal of which is payable only at the end of 
many years, with interest payable periodically; and 
that the holder of such bond may wait until the ma- 
turity of the bond itself before he demands any in- 
terest. Unpaid coupons attached to the bond, there- 
fore, do not affect the bond. The ease with which 
the over-due coupons can be removed from a bond 
not yet due, before transferring it, and thereby avoid 



42 RAILROAD BONDS AND NOTES 

the objection to their presence, would tempt the fre- 
quent commission of fraud. Further, a railroad 
company may not put out the bonds until one or 
more coupons are past due. While it is the custom 
to cut off the over-due coupons, under such circum- 
stances, they may be permitted to remain, though it 
is quite unusual to do so, and their amount included 
in the purchase price. 

It may be said as a general proposition that the 
presence of over-due coupons on a bond is not suffi- 
cient in itself to dishonor the bond ; yet, the fact that 
the interest is overdue is material and important, 
and will be considered in connection with other cir- 
cumstances as evidence of the good or the bad faith 
of the purchaser. 

Interest on overdue coupons, attached and de- 
tached; rates of interest allowable. 

Detached coupons when negotiable in form, as 
was seen, are regarded as securities so separate and 
distinct from their bonds that they may be sued upon 
independently of and without the production of the 
bond. And under certain circumstances they draw 
interest like other obligations for the payment of 
money. 

As a general rule, interest is allowed only on 
principal. But this rule has been modified somewhat 
in the case of coupons, negotiable in form, that have 
been detached from their bonds and negotiated, be- 



VARIOUS KINDS OF BONDS AND NOTES 43 

cause when negotiable in form and detached and 
negotiated they are separate and independent securi- 
ties. Under such conditions they draw interest from 
the time of their maturity like other securities. 

Interest on overdue coupons, detached from their 
bond, though it is interest on overdue instalments of 
interest, is not regarded as usury. 

But when the coupons, whether remaining attached 
to their bonds or detached therefrom, are in the 
possession of the holder of the bond itself, a different 
question presents itself. While there is a conflict in 
the decisions of the courts of the different States on 
this point, the weight of authority holds that when 
the coupon remains in the hands of the holder of the 
bond, whether attached or detached, they are merely 
incidents of the bond and are promises for the pay- 
ment of its interest. The coupon, under such cir- 
cumstances, is regarded strictly as interest and not 
as a separate security, and no interest will be allowed 
on this overdue interest. But when the coupons are 
negotiable in form and have been detached and are 
held by one other than the holder of the bond itself, 
interest is allowed on them from the dates of their 
maturity. 

The rate of interest on the overdue coupons may 
be fixed in the mortgage, or by other arrangement 
between the parties, and the rate of interest thus 
agreed upon will be enforced provided it does not 
violate any law. 



44 RAILROAD BONDS AND NOTES 

Where there is no provision made by the parties, 
the rate of interest on the overdue coupons, in most 
States, is the legal rate of interest at the place where 
they are payable, without regard to the rate of inter- 
est the coupon bears. 

However, the courts of some States hold that the 
rate of interest payable on coupons after maturity, 
where there is no provision to the contrary, shall 
continue the same as they bore before maturity. 
Notwithstanding this latter ruling, should a coupon 
holder sue and reduce his claim to a judgment, his 
judgment thus obtained (which has merged and dis- 
posed of his original claim on his coupon), will bear 
the legal rate of interest fixed by the law of the 
State in which the judgment is had. This rule with 
regard to the rate of interest that judgments shall 
bear is the same in all the States. 

The security for the coupons ; priorities and prefer- 
ences. 

The coupons are secured by the same mortgage 
that secures the bonds. 

The bonded debt of the railroad company consists 
of the bonds and the interest. The interest-coupons, 
therefore, are a part of that debt. An assignment of 
a part of the mortgage debt, such as a bond or a de- 
tached coupon, carries with it a corresponding inter- 
est in the mortgage security. Consequently the 
holders of detached coupons are entitled to share in 



VARIOUS KINDS OF BONDS AND NOTES 45 

the proceeds of the security proportionately with the 
holders of the bonds. 

Claims for interest that accrue during the fore- 
closure are entitled to the same rights as claims for 
the interest theretofore due and unpaid. Should 
the money realized from the sale of the mortgaged 
property be insufficient to pay all in full, then the 
coupons and the bonds bear the loss proportionately, 
unless there is some arrangement agreed upon to the 
contrary. Then such other arrangement will be 
enforced. 

Ordinarily, coupons are paid in the order in which 
they fall due. But, in foreclosure proceedings they 
are paid without regard to when they fall due, and 
all stand on the same footing. Then priority in 
their maturity gives no priority in their payment. 

In applying these rules, the courts give effect to 
the equitable principles of law which give equality 
among persons having a common right to payment 
out of a fund provided for the benefit of all. And 
this rule is not departed from without clear evidence 
of an intention to give one a preference over the 
other. 

Provisions for preference may be and sometimes 
are made in railroad mortgages. Accordingly, a 
railroad mortgage, securing several classes of bonds 
and their coupons, may give certain priorities and 
preferences in payment to one class over another; or 
it may prefer the coupons over the bonds themselves; 



46 RAILROAD BONDS AND NOTES 

or it may prefer coupons in the order in which they 
fall due; or it may make such other arrangement as 
has been agreed upon by the parties. The courts 
recognize and enforce such stipulations in railroad 
mortgages. 

Rights of coupon holders as to each other; bona 
fide holders of coupons. 

Coupons may be affected by the original invalid- 
ity of their bonds; but, as among themselves, one 
coupon is not affected by any claims or defense that 
may exist against the others. 

When the coupon is entitled to stand as a separate 
and independent negotiable security, it is protected 
by law in the hands of a bona fide holder, so that it 
shall be subject in his hands only to such defenses as 
deny its legal existence, that is, showing the non- 
existence of the facts necessary to give it legal life, 
such as forgery, lack of power to make the issue, that 
the coupon was not delivered, that it is not properly 
certified by the trustee, or that his certificate is 
forged. The same rules apply to negotiable cou- 
pons as to negotiable bonds. See Rights of bona 
fide holders of negotiable bonds. Page 23. 

Statutes of limitations; as to the bonds, as to the 
coupons. 

A party having the right to sue must not sleep on 
his rights; he must bring his action into court with 



VARIOUS KINDS OF BONDS AND NOTES 47 

reasonable diligence. The statutory laws of the 
various States have classified the different kinds of 
actions and have declared the periods within which 
each class shall be commenced. Actions on written 
instruments which have been executed by the party 
sought to be charged by putting his seal to the paper, 
must be sued upon, as a quite general rule, within 
twenty years from the time that the right to sue first 
existed. Actions on written instruments, to which 
the seals of the parties to be sued have not been 
attached, must be sued upon, as a general rule, within 
six years from the time the right to sue first existed. 
Should the action be brought after such period has 
expired, it may be defeated by the defense that it 
is "outlawed" by the statutes of limitations, as these 
statutes are called. 

The statutes of limitation begin to take effect or 
to '"run," as the expression is, from the time that the 
right to sue first existed ; which, in the case of bonds 
and detached coupons, is from the time they became 
due and payable, according to their terms, and were 
not paid. Should a demand be necessary, the stat- 
ute begins to run from the time the demand was 
made and not complied with. 

A railroad bond is a written instrument executed 
under the seal of the railroad company and, there- 
fore, the twenty years statute of limitation applies. 

The same statute of limitation of twenty years 
is applied to detached coupons. Ordinarily, the 



48 RAILROAD BONDS AND NOTES 

coupon is a written instrument not under seal, and 
it seems, therefore, that the six years statute should 
apply; but the courts have held that the coupon so 
strongly partakes of the nature of the bond from 
which it has been severed that the twenty years 
statute shall apply. But the time in the case of 
detached coupons from which the statute of limita- 
tions shall begin to run is from the time such coupon 
was payable, without regard to the maturity of the 
bond or when the bond became payable. 

Registered bonds; the act of registration; effect on 
principal and on interest. 

While the coupon bond has the advantage of easy 
negotiation, and therefore commends itself to those 
seeking a security that may be quickly transferred 
and readily converted into cash, and which is often 
accepted as the representative of money, it has the 
disadvantage of the risks that attend its loss or theft. 
The registered bond, therefore, is sought by those 
seeking a permanent form of investment. The dan- 
ger attending loss, destruction, or theft, is avoided 
in the registered form of bond. 

A registered bond is one that bears the name of 
its payee on its face, and is registered in the name 
of its payee on the books of the railroad company, 
or of the fiscal agency designated for that purpose. 

Railroad mortgages invariably provide that the 
person in whose name the bond shall be registered, 



VARIOUS KINDS OF BONDS AND NOTES 49 

SO far as the railroad company or the trustee shall 
be concerned, shall be regarded as its owner, and 
that payment of all or any part of the bond shall be 
made only to such registered owner or his order. 
The interest and the principal of the bond is paid 
only to him who appears on the registry as owner of 
the bond. 

The registered bond has no coupons. 

A registered bond may be issued in the first in- 
stance; or the holder of a coupon bond, under the 
privilege usually granted him by railroad mortgages, 
may have it registered. 

The holder of a coupon bond who wishes to reg- 
ister it presents it to the railroad company or the 
fiscal agency, when one is designated for that pur- 
pose, whereupon the coupons are cut off and sur- 
rendered. The name of the holder is then entered 
on the registry or books kept for that purpose and 
an indorsement made on the bond noting its regis- 
tration ; or a new bond may be issued, with the name 
of the registered owner appearing on its face as 
payee. 

When the new registered bond is issued in the 
place of the surrendered coupon bond, the latter is 
destroyed. When the coupon bond is not surren- 
dered, the coupons are cut off, and the body of the 
coupon bond is used and the notation made that it 
is registered in the name of the registered owner, 
as payee. The body of the coupon bond is the same 



50 RAILROAD BONDS AND NOTES 

as that of the registered bond, with the exception 
of those facts that show the registration, and also 
that the coupons are missing. 

Should no fiscal agency be designated, then the 
bond is presented for registration to the railroad 
company at its general office. Should the person 
desiring to register a bond live at a distance from 
the place of registration, the practise usually fol- 
lowed is to send the bond by registered mail or ex- 
press. The local banks or bankers take care of such 
matters for clients. 

Transfer of registered bonds ; converting registered 
bonds into coupon bonds ; payment of interest. 

The transfer of a registered bond is made by the 
last registered owner executing a written assignment 
or power to transfer the same, in a form approved 
by the railroad company, and delivering both to the 
new owner. Some bonds have the form printed on 
their backs. 

Until this is done the bond is like a check, pay- 
able to a named payee and which has not been en- 
dorsed and transferred by him. 

The bond is in turn registered by the person to 
whom it has thus been transferred by the registered 
owner by presenting it at the place for registration 
for that purpose. 

It is usually provided in railroad mortgages that, 
after registration, no transfer shall be valid so far 



VARIOUS KINDS OF BONDS AND NOTES 51 

as the railroad company is concerned unless made 
on its books and by the registered owner in person, 
or by his attorney duly authorized in writing, and 
similarly noted on the bond. 

The stock exchanges and the registries of some 
of the railroad companies have rules with regard 
to the transfer of registered bonds that they insist 
shall be strictly observed. A disregard of these re- 
quirements, even in the slightest detail, may cause 
annoyance by the delay in correction. Registered 
bonds, as a rule, are not regarded as "good deliv- 
eries." 

Where the bond Is registered in the name of a 
person since deceased, the endorsement, assignment, 
or power of attorney should be made and executed 
by the executor or administrator, as the case may 
be. 

Registered bonds may be presented to the rail- 
road company, or its fiscal agency designated for 
that purpose, should the terms of the mortgage grant 
this privilege, to have noted on them that they are 
payable to bearer. Their negotiability is thus re- 
stored and they may then be transferred by their 
manual delivery from hand to hand, without any 
indorsement, written assignment, or power, or any 
formality other than their physical delivery, just 
as if they were coupon bonds originally and had 
never been registered. A new set of coupons are 
then issued to accompany the bond. 



52 RAILROAD BONDS AND NOTES 

Interest on a fully registered bond is paid when 
due directly to the registered owner of the bond; 
there is no need for presentation of the bond itself. 
The custom is to draw a check to the order of the 
last registered owner and mail it to him to his ad- 
dress as it appears on the registry. The payment 
of principal or interest, or both, may be made to 
another pursuant to the order of the registered 
owner. 

Where the bond is registered as to principal only 
and the coupons are not destroyed but permitted to 
continue as representative of interest, then such cou- 
pons are transferrable, after they are severed from 
the bond, by their manual delivery, just as if they 
were the coupons of a coupon bond. The principal 
only is paid to the registered owner and the interest 
is paid to whomsoever presents the coupon without 
regard to the ownership of the bond itself. 

Registration of coupon bonds as to principal only. 

The coupon bond may be registered in its entirety, 
that is, as to both principal and interest as just dis- 
cussed; or it may be registered as to the bond (prin- 
cipal) only, and the coupons permitted to remain 
negotiable as theretofore. Then the principal of 
the bonds is payable to the registered owner and the 
coupons are paid to their holder or holders without 
regard to the ownership of the bond or its registra- 
tion. 



VARIOUS KINDS OF BONDS AND NOTES 53 

The coupons continue their currency and may be 
circulated as if the bond had not been registered. 

Registration of both bonds and coupons. 

A form of registration rarely used is that by which 
the bond itself is registered and the coupons are also 
registered. Then principal and interest are paid 
only to the registered owner of each. The only dif- 
ference between this kind and the usual form of 
registered bond is in the mode of collection of in- 
terest. The interest of the ordinary registered bond 
is sent to the last registered owner of the bond; the 
interest on the bond registered both as to the bond 
and the coupons is collected by means of the cou- 
pons. The interest is paid to the registered owner 
of the coupons. 

When the set of coupons become registered and 
this fact is noted on their face, they lose their ne- 
gotiability and capacity to pass title by delivery 
from hand to hand, but must then be assigned in 
writing as in the case of the bond itself, and the pro- 
visions for the registration by subsequent holders or 
owners of the bonds apply to the same situation with 
relation to the coupons. See Registered bonds: the 
act of registration; effect^ etc. Page 48. 

Interchangeable or convertible bonds. 

The privilege to change or convert a coupon bond 
into a registered bond, or to re-convert or change 



54 RAILROAD BONDS AND NOTES 

back the registered bond into a coupon bond, is quite 
generally conferred by railroad mortgages. Bonds 
with these privileges are usually called "convertible 
bonds." The same term is also employed to desig- 
nate a bond which gives its owner or holder the right 
to convert it into the capital stock of the issuing 
company. See Provisions for converting bonds into 
capital stock of the railroad company. Page 105. 

Should the owner of a registered bond desire to 
change it into a coupon bond, he must have a new 
coupon bond issued to him, or at least a new set of 
coupons must be issued and a notation made on the 
old bond that it is thenceforth payable to bearer. 

When the coupon bond has been registered in the 
ordinary form, that is, as to principal and interest, 
it is shorn of its coupons. Having been thus con- 
verted from a coupon bond to a registered bond it 
cannot be reconverted into a coupon bond because 
the coupons, which are an indispensable part of a 
coupon bond, no longer exist. A new set of cou- 
pons are necessary. The usual custom is to sur- 
render the old bond and a new coupon bond is is- 
sued in its place, with the matured coupons cut off. 

A bond registered as to the bond (the principal) 
only, with the coupons continuing their negotiabil- 
ity may be reconverted into an ordinary coupon bond 
without much difficulty. This is done by an en- 
dorsement on the bond by the registered owner that 
it is payable to bearer, and by a similar notation 



VARIOUS KINDS OF BONDS AND NOTES 55 

by the railroad company or its representatives at 
its fiscal agency. The negotiability of the bond 
which as to its principal had been temporarily with- 
drawn is thus restored. 

Railroad bonds are usually secured by a mort- 
gage or "deed of trust," as it is sometimes called. 
These terms are used interchangeably. The follow- 
ing chapter is addressed to an analysis of the usual 
form of railroad mortgage and a discussion of its 
various provisions, including the lien of the mort- 
gage and the protection and rights it gives the hold- 
ers of the securities issued under it, under various 
conditions, and, treating, too, of the sinking fund, 
refunding, redeeming, calling in, serial payment, and 
conversion arrangements. 



CHAPTER III 

RIGHTS AND REMEDIES WITH RELATION TO THE 
MORTGAGE OR DEED OF TRUST 

Purpose o£ the mortgage or deed of trust. 

The mortgage, or deed of trust as it is sometimes 
called, is the instrument or document that secures the 
bonds and their interest by charging certain property 
of the railroad company with their payment. 

In some States the mortgage or deed of trust is 
unnecessary as their statutes declare that the bonds 
of railroad companies shall be a lien upon all its 
property from the time of their issue without any 
mortgage. 

The terms "mortgage" and "deed of trust" are 
used interchangeably. They mean the same docu- 
ment or legal instrument. The more popular term 
is mortgage, and it will be used in these pages. 

The mortgage pledges the property therein men- 
tioned, and charges it with a lien in favor of the 
bonds and coupons it secures, so that their holders 
shall have the exclusive right to take this property 
in satisfaction of their claims, and be paid out of it 
in full, before any other creditor, who is not secured 

56 



MORTGAGE OR DEED OF TRUST 57 

by a lien on this mortgaged property prior or su- 
perior to that of the mortgage, receives anything. 

General description of the mortgage. 

The mortgage is executed by the railroad com- 
pany, as mortgagor, to the trustee, as mortgagee. 
The bondholders are not directly made parties to 
the mortgage; but it is with the same effect as if 
each bondholder were made a party to it. The 
trustee is the party to the mortgage in behalf of 
the bondholders. The mortgage is enforced by the 
trustee for the benefit of whomsoever may be the 
holders of the outstanding bonds and coupons under 
such mortgage at the time it is enforced. 

The trustee, generally speaking, represents all the 
holders of the securities under the mortgage. He is 
their trustee: the guardian of their rights with rela- 
tion to that mortgage. The mortgage is made to 
him as a party instead of to the bondholders di- 
rectly, because trusteeship of this character is neces- 
sary when a mortgage is given to secure a large 
issue of railroad bonds. It would be impracticable 
to make each bondholder a party to the mortgage, 
as each transfer of a bond would necessitate the 
transfer of the owner's interest in the mortgage. 
This bewildering number of transfers would retard 
the ready negotiation of railroad bonds secured by 
mortgage, and correspondingly impair their value. 
It would be impracticable to have this large num- 



58 RAILROAD BONDS AND NOTES 

ber of bondholders, unknown to each other, and 
scattered over the civilized world, unite to take legal 
action. It becomes necessary, therefore, that one 
or several representatives shall be chosen to act for 
all. Hence the trusteeship of railroad mortgages. 

The effect of the mortgage is to pass the title and 
ownership of the property it covers (usually the en- 
tire road or a branch line, and sometimes other prop- 
erty as stocks and bonds of other companies, etc.) 
to the trustee; by a provision in the mortgage the 
railroad company is permitted to retain possession 
of the road that is mortgaged, and to use and to 
operate it, and is entitled to the income it earns until 
it defaults under the mortgage. By a default is 
meant a failure to pay the interest, or the principal 
of the bonds, or an instalment of principal; or an 
omission on the part of the railroad company to do 
something it has undertaken to do in the mortgage, 
which is generally an act intended to safeguard and 
to protect the mortgaged property so that the se- 
curity of the bondholders will be preserved to them; 
or the doing of some act with respect to the mort- 
gaged property that jeopardizes the security. Upon 
such a default the mortgage usually authorizes the 
trustee to take possession of the mortgaged road (if 
securities are mortgaged they are turned over to 
the trustee upon the execution of the mortgage) and 
to operate such mortgaged road and, if necessary, 
to sell it to satisfy the claims of his bondholders 



MORTGAGE OR DEED OF TRUST 59 

against it; he may sell sometimes without entering 
into possession and operating it. The securities 
that have been turned over to him under the mort- 
gage are sold by him ; should the deposited securities 
consist of bonds of other companies secured by mort- 
gages on their property he may have to foreclose the 
mortgage securing such deposited bonds, should the 
company issuing them default under their mortgage. 
In addition to these special powers that railroad 
mortgages usually grant trustees, he may apply to 
the court to foreclose the mortgage and sell the 
property under its direction asking that, in the mean- 
time, a receiver be appointed to take possession of 
the mortgaged road until it is sold on foreclosure 
sale, or until the property is taken over in the course 
of the reorganization of the road. While the re- 
ceiver holds such mortgaged road, he is usually au- 
thorized by the court to operate the road. 

Power of railroad company to mortgage its prop- 
erty and its franchise to operate; opinion of 
counsel. 

In some States, railroad companies have the same 
powers as ordinary private corporations to mortgage 
their property, including their franchise to operate, 
for any lawful purpose necessary to carry out the 
objects for which they were incorporated, unless this 
power is expressly negatived by its charter. 

In other States, and by the weight of authority, 



6o RAILROAD BONDS AND NOTES 

railroad corporations do not have this same power 
that ordinary private corporations have, and may 
neither mortgage their franchise nor their property 
where its sale would interfere with the operation of 
the road, unless this power is granted by their char- 
ters. 

These latter authorities rest their conclusions upon 
the distinction that railroad corporations are "quasi 
public" corporations, immediately connected with 
the public welfare, serving public needs and necessi- 
ties; that they receive from the people of the state 
the necessary franchises or special privileges to run 
their roads between certain terminii and over certain 
territory to the exclusion of others; that by accept- 
ing these franchises they assume the duty to main- 
tain their roads and to continue them in existence 
and operation ; and that they may not by mortgage 
or sale of their property or franchises abandon or 
interfere with the performance of these duties, un- 
less the State from which they receive them con- 
sents. 

The State having granted this exclusive privilege 
to operate a railroad between certain terminii and 
over certain territory to one corporation to the ex- 
clusion of others continues to regulate its exercise. 
As the mortgage may result in a sale, the franchise 
may not be mortgaged without the permission of the 
legislature that granted it. However, the power to 
mortgage their franchises to operate is usually given 



MORTGAGE OR DEED OF TRUST 61 

to railroad companies by the legislatures of most 
States. 

The franchise referred to in the preceding dis- 
cussion is the special privilege to operate a railroad. 
It must be distinguished from the franchise to exist 
as a corporation. 

The franchise to exist as a corporation is the right 
the legislature grants to do business of a designated 
nature to the requisite number of persons who have 
complied with certain requirements of the statute 
laws of its State. A legal body is thus created that 
becomes a distinct legal entity, separate from its 
stockholders. This legal body holds property, 
makes contracts, and does all other acts necessary to 
carry on the business for which it was incorporated. 
When it is incorporated to transport persons and 
property, carrying on the general business of a rail- 
road company, the State gives a special privilege or 
franchise to operate a railroad, which other corpora- 
tions do not have by mere reason of their incorpora- 
tion. This franchise to operate a railroad between 
certain points and over certain territory is exclusive 
and limited to this corporation to which it is granted. 
This franchise to operate a railroad is property and 
like other property is separable from the corporation 
that owns it. 

The question of the power of the railroad com- 
pany to execute the mortgage is passed upon by well 
known and reputable lawyers, whose written opinion 



62 RAILROAD BONDS AND NOTES 

usually accompanies the mortgage. This opinion 
is to the effect that the railroad company has been 
legally organized, that it had legal power to issue 
the bonds in question, and also the mortgage to se- 
cure them, that such bonds have been legally issued 
and' are valid obligations of the railroad company, 
and that the mortgage is in proper form to entitle 
the holders of the bonds to the protection of the 
security pledged by it. 

Where the railroad company had the power and 
authority to issue the bonds, the bondholders are 
entitled to assume that all the requirements of its 
charter and the laws of the state with respect to the 
issuance of the bonds have been complied with. 
This ruling has been made necessary by a considera- 
tion of the nature of railroad bonds, and the objects 
they are intended to serve, for it would defeat their 
very purpose if one were compelled to inquire as 
to these facts when about to purchase a railroad 
bond in a distant State, or perhaps a foreign coun- 
try, offered for sale in the market. 

The lien that the mortgage gives the bondholders; 
liens generally discussed. 

The mortgage creates a lien on the property it 
covers in favor of the trustee, but in behalf of the 
holders of the outstanding securities under it and 
for their benefit. 

By a lien is meant that the property to which it 



MORTGAGE OR DEED OF TRUST 63 

attaches is charged with a special obligation to those 
in whose favor it exists. 

The effect of the lien of the mortgage is to take 
the property against which the mortgage exists and 
reserve it to satisfy in full the bonds and coupons 
it secures, before creditors with later liens against 
the same property and creditors with no liens re- 
ceive anything out of it. However, all claims un- 
der liens prior in point of time, or liens superior by 
reason of their nature, must be satisfied in full out 
of the mortgaged property before bondholders re- 
ceive anything under their mortgage. 

Liens exist, generally, in favor of recorded mort- 
gages, taxes, judgments, etc. 

Liens, generally speaking, have priority accord- 
ing to the time they attach to the property, except 
those liens which by reason of their nature, usually 
take precedence over all mortgages or other liens 
without regard to the time when they attached, such 
as liens for taxes and other governmental charges. 
See Taxes, Assessments, Governmental charges. 
Page 254. The courts may, also, under some cir- 
cumstances, order that receiver's certificates and 
claims for "operating expenses" be paid out of the 
mortgaged property before the bonds under the 
mortgage receive anything therefrom. See Receiv- 
er's certificates, etc. Page 210. And see Operating 
expenses prior to receivership. Page 245. 

The legal effect of a lien against railroad property 



64 RAILROAD BONDS AND NOTES 

is determined by the law of the State where the 
property is located upon which the lien is sought to 
be enforced. The lien of the mortgage attaches 
when the mortgage is recorded in the office of the 
public official designated for that purpose by the 
law of the State where the property is situated. 
These public officers are either the clerk or the reg- 
ister of the county or the secretary of the State in 
which the property is situated. The lien of a judg- 
ment attaches to the property of the road from the 
time such judgment is docketed in the office of the 
clerk of the county, and therefore attaches to the 
property of the road situated in that county. A 
transcript of such judgment may be filed in other 
counties of the State and thus reach the property in 
such other counties. 

Recording the mortgage. 

Recording the mortgage means that it is copied 
at length in books kept for that purpose in the office 
of the public official charged by law with that duty. 
It is then a public record and all may examine it. 

The purpose of recording, filing, or registering, 
the mortgage, as these acts are interchangeably 
called, is to give notice to all persons dealing with 
the property, either as creditors of the corporation 
or as purchasers of that property, that it is charged 
with certain payments and obligations, and that any 
rights they may acquire with respect to that prop- 



MORTGAGE OR DEED OF TRUST 65 

erty must be subject to and inferior to this prior 
charge. 

In some States there are statutes which provide for 
a special manner in which railroad mortgages may 
be recorded. 

These special statutes for recording are usually 
to the effect that the mortgage shall be recorded with 
a State official, such as the secretary of State, and 
thereupon the lien of the mortgage shall attach to 
all the property it covers located in that State. This 
dispenses with the need of recording the mortgage 
in each county of the State in which the property is 
situated. 

Statutes in some States make a railroad mortgage 
a lien on the property it covers without recording. 

Where there is no statute for special recording, 
nor for making it a lien without recording, the mort- 
gage must be recorded in the office of the public 
official designated by law for that purpose, usually 
the clerk of each county in the State in which the 
mortgaged property is situated. To facilitate re- 
cording of mortgages where the property is situated 
in several counties or States, a number of originals 
are executed simultaneously, all being recorded as 
the same document. They are duplicate originals. 

Where a railroad mortgage covers both real es- 
tate and personal property, it is recorded both as 
a real estate and a chattel mortgage. 

Failure to record, or to properly record, the mort- 



66 RAILROAD BONDS AND NOTES 

gage does not affect the rights of the bondholders 
and their trustee in the mortgaged property so far 
as the railroad company is concerned ; but as to third 
persons a situation entirely different presents itself. 
See Defective mortgages; partly defective. Page 

67. 

Valid bonds as affected by defective mortgages; 
void bonds. 

If the bonds be valid, the fact that the mortgage 
given to secure them is void will not affect them in 
any way. 

The mortgage affects the security only and if 
void will deprive the bondholders of their security. 
But the bonds (the obligation of the issuing com- 
pany to pay) will remain fully valid and effective. 
The invalidity of the mortgage will not taint the 
bonds, for the obligation to pay the debt they repre- 
sent continues ; the attempt to secure them has failed. 
The debt remains the same though the security has 
been lost. 

Where, however, the bonds are void the mortgage 
though executed according to form and all the re- 
quirements, and properly recorded, is void. 

The mortgage is given to secure an existing in- 
debtedness represented by the bond, and when such 
debt is void and does not legally exist, there is no 
debt to secure, and the attempt to mortgage is of 
no effect. 



MORTGAGE OR DEED OF TRUST 67 

That some of the bonds secured by the mortgage 
are invalid does not, as a general rule, affect the 
validity of the mortgage nor any legal action under 
it. The mortgage continues to secure those bonds 
that are valid. 

Defective mortgages ; partly defective. 

Railroad mortgages executed contrary to law or 
without power are void. 

A railroad mortgage covering several parts or di- 
visions of a road may be void as to some of them 
and valid as to the others. 

Should the mortgage attempt to include some 
property that the railroad company had no power 
to include, the mortgage is nevertheless good as to 
the property it had authority to include, though void 
as to the other. 

Synopsis of railroad mortgage. 

The following is a synopsis or outline of the usual 
form of railroad mortgage. It contains those pro- 
visions commonly found in railroad mortgages and, 
in addition, sinking fund, redeeming, calling in, re- 
funding, and conversion into capital stock of the rail- 
road company arrangements, besides those other spe- 
cial provisions that the particular circumstances of 
an issue may require. 



68 RAILROAD BONDS AND NOTES 

(a) The mortgage recites the parties to it. Pur- 
poses of the mortgage. 

The parties are the railroad company and the trus- 
tee. The bondholders are not made parties to the 
mortgage directly. See Reasons for trusteeship. 
Page 117. 

The purposes for which the money is to be raised 
are set forth. These are usually to transact the reg- 
ular business of the corporation and to exercise its 
corporate rights and privileges, or to carry out any 
lawful purpose of its incorporation : and to discharge 
underlying liens, when the issue is of refunding 
bonds. 

(b) Consents of stockholders, directors, public 
commissions to the issue of bonds and the 
mortgage. 

The consent of the holders of the requisite propor- 
tion of the stock of the railroad company to the 
execution of the mortgage and to the issuance of the 
bonds is then stated in the mortgage, and, too, that 
at a special meeting, called for that purpose, the 
board of directors approved the mortgage and passed 
its resolution that the railroad company execute it. 

In nearly all the States there are statutes which 
provide that a corporation shall not execute any 
mortgage on its property without the consent of the 
holders of a specified proportion of its capital stock. 
The requisite proportion is usually two-thirds of the 



MORTGAGE OR DEED OF TRUST 69 

amount of its outstanding stock. In some States 
the consent of the board of directors is also necessary. 

Should the mortgage be executed without the 
requisite consent of the stockholders, neither the rail- 
road company nor any of its creditors have any 
standing to dispute the validity of the mortgage on 
this account. This requirement is for the benefit 
and protection of the stockholders and can be taken 
advantage of only by them. But the stockholders 
may lose their right to object to a mortgage lacking 
this consent, by their unreasonable delay in attack- 
ing it or by permitting the railroad company to ac- 
cept the proceeds under it. 

Under the laws of most of the States a statement, 
setting forth the basis or financial plan upon which 
the bonds are to be issued, must be submitted to a 
public board or commission which must approve the 
issue before it is put out. A recital that this has 
been done is invariably included in the mortgage. 

(c) Amount of the issue; limitations; protection 
against over-issue; closed mortgages; open- 
end mortgages; open mortgages. 

The amount for which bonds may be issued by a 
railroad company is sometimes limited by statute. 
These statutes are usually to the effect that the total 
amount of the outstanding indebtedness of the com- 
pany shall not exceed a certain specified proportion 
of its capital stock or property. 



70 RAILROAD BONDS AND NOTES 

Bonds issued in excess of the limitations fixed by- 
statute are void. 

Where the railroad company issues bonds in ex- 
cess of the amount limited in the mortgage, but not 
in excess of the amount limited by a statute, such 
excess issue is good and fully enforceable in the hands 
of a bona fide holder, and are entitled to share in 
the security with the other bonds. Excess issues are 
guarded against by provisions for authenticating 
each bond by a certificate of the trustee. 

The mortgage, therefore, invariably provides that 
the trustee shall authenticate each bond by en- 
dorsing or attaching his certificate to the effect that 
such bond is one of the issue secured by the mort- 
gage, and that its holder is entitled to the benefits 
of the mortgage and of the trusteeship. No bond is 
valid for any purpose where such a provision is con- 
tained in the mortgage, as it invariably is, without 
this certificate of the trustee. Should such certifi- 
cate be forged the bond is void though in the hands 
of a bona fide holder for value. It is usually pro- 
vided in the mortgage that the bonds shall be turned 
over to the trustee and put out by him after his 
certificate has been endorsed or attached. Some- 
times after he has certified to the bonds the trustee 
turns them over to the railroad company, under the 
terms of the mortgage, and it puts them out. 

The aggregate amount of the issue is usually speci- 



MORTGAGE OR DEED OF TRUST 71 

fied and limited in the mortgage. All the bonds of 
the issue, however, need not be put out at once. 

Where the money is raised for construction, bonds 
for a specified amount are usually put out, from time 
to time, as the work progresses. 

Part of the authorized amount of an issue may 
be reserved to retire bonds or notes or underlying 
liens soon to fall due; or provision may be made to 
issue a fixed amount each year, or at some other 
specified time; or the entire amount may be put out 
at once or in such amounts and at such times as the 
railroad company shall require for its business. 

When the aggregate amount of the issue is limited 
and is put out all at once it is generally called a 
"closed mortgage." When the aggregate amount is 
limited but is not put out all at once, but from time 
to time, at specified periods or on certain occasions, 
and in amounts agreed upon in the mortgage, it is 
an ''open end mortgage." The amount of the en- 
tire issue secured by an "open end mortgage" is lim- 
ited but is put out, from time to time, according to 
the terms of the mortgage. 

The "open mortgage," so called, is one wherein 
there is no limit on the aggregate amount of bonds 
that may be issued under and secured by it. This 
kind is rare. 

The favorite form of mortgage is the open end 
mortgage for under it the company may raise money 



72 RAILROAD BONDS AND NOTES 

for present requirements and anticipate future needs. 

See General mortgage bonds,* blanket mortgage 
bonds. Page 269. 

(d) Description of the bonds of the issue to be 
secured by the mortgage. 

No. ^ $ 

United States of America 
State of 
The Railroad Company, First Mort- 

gage, Five Per Cent., Fifty Years, Refunding 
Gold Bonds. 

The Railroad Company, a corporation or- 

ganized and existing under the laws of the State of 
, for value received, hereby agrees to pay to 
bearer, unless this bond is registered, then to the 
registered owner thereof, on the day of , 
19 , the sum of dollars, in gold coin of the 
United States, of the present standard of weight 
and fineness, at the office or agency of the Railway 
Company, in the City of New York, together with 
interest thereon at the rate of five per centum per 
annum from day of , 19 , payable at 

the same place in like gold coin on the days of 

and , in each year, on presentation 

and surrender of the annexed coupons as they sever- 
ally become due. 

This bond is one of a series, of like tenor and date, 
numbered consecutively from one upward, issued 
and to be issued under and in pursuance of, and all 
equally secured without priority or preference by a 
mortgage or deed of trust to the Trust Com- 



MORTGAGE OR DEED OF TRUST 73 

pany, of New York, bearing even date herewith, of 
all the line of railroad of said Railroad Company 
now built or to be built, and the franchises author- 
izing the construction and operation thereof now 
owned or hereafter to be acquired, as therein set 
forth. 

The principal of this bond may in the manner 
and with the effect prescribed by the said mortgage 
or deed of trust, be declared to be due by reason of 
six (6) months' default in the payment of interest 
or of six (6) months' default in the performance of 
any other obligation imposed by the said mortgage 
or deed of trust on the said Railroad Company. 

No recourse shall be had for the payment of the 
principal or interest of this bond, or for any claim 
based thereon or in respect thereof or of said mort- 
gage or deed of trust, against any stockholder, offi- 
cer or director of the said Railroad Company, 
whether by virtue of any statute or by enforcement 
of any assessment or penalty or otherwise; but this 
provision shall not be held to exempt any officer or 
director from liability resulting from any fraud or 
wilful neglect. 

Both the principal and interest of this bond are 
payable without deduction for any tax or taxes which 
the Railroad Company may be required to pay or 
retain therefrom under any present or future laws 
of the United States of America or of any State, 
county or municipality therein, said Railroad Com- 
pany hereby agreeing to pay all such tax or taxes. 

This bond may, at any time, upon production 
thereof to the said Railroad Company, and prior en- 
dorsement being made thereon, be registered in the 
owner's name on the books of the said Railroad Com- 



74 RAILROAD BONDS AND NOTES 

pany. After such registration, no transfer of the 
bond shall be valid unless made on the said books by 
the registered owner in person or by his attorney duly 
authorized, and similarly noted on the bond. This 
bond may be discharged from registry by being in 
like manner transferred to bearer as before. The 
registration of this bond shall not affect the negoti- 
ability of the coupons, which shall continue to be 
transferable by delivery. 

This bond shall not become obligatory until the 
certificate endorsed hereon is signed by the said 
trustee or its successors in the trust. 

{Note, If the issue is for refunding purposes, the 
statement will be found here that a certain propor- 
tion of the bonds shall be issued only in exchange, 
bond for bond, for the underlying issue to be retired, 
under the conditions described in the mortgage; or 
such other plan of refunding as the mortgage shall 
contain, will be set forth. See Refunding plans. 
Page .) 

{Note, If the bonds are to be called in for the 
sinking fund, the provisions therefor are included 
here. See Sinking fund arrangements. Page .) 

{Note, If the railroad company reserves the right 
to call in the bonds at the expiration of any period, 
the provisions therefor are inserted here, with the 
price at which they shall be called in or redeemed. 
See Redeeming bonds; Calling bonds in. Page .) 

{Note, Provisions for converting the bond into 
the capital stock of the Railroad Company are in- 
serted here, if that be one of the features of the 
issue. See Provision for converting bonds into cap- 
ital stock of the railroad company. Page .) 

{Note, Should the Railroad Company, as it 



MORTGAGE OR DEED OF TRUST 75 

usually does, waive the benefit and advantage from 
any and all stay, extension, redemption, valuation or 
appraisement laws then or thereafter in force, a pro- 
vision to that effect is inserted in the bond.) 

In Witness Whereof, the Railroad Com- 

pany has caused its corporate seal to be hereunto 
affixed and the same to be attested by the signatures 
of its President and Secretary on this day of 

, 191 . 

The Railroad Company, 

by 
Attest : President. 

(Seal) 

Secretary. 

(Form of Coupon.) 
No. $ 

The Railroad Company will pay to bearer, 

on the day of ,19, free from taxes, 

Dollars in United States Gold Coin, at its office or 
agency, in the City of New York, for semi-annual 
interest, on its First Mortgage, etc.. Five Per Cent., 
Gold Bond, No. , unless the said bond shall 

have been called in for previous redemption. (See 
Redeeming bonds; Calling bonds in. Page 98.) 

Treasurer. 
(Trustee's Certificate.) 
This is one of a series of bonds described in the 
Mortgage or Deed of Trust, referred to in the within 
bond. (See Amount of issue^ etc.; protection 
against over-issue^ etc. Page 69. Also see TruS' 
tee's certificate. Page 70.) 

Trust Company. Trustee. 
by 

Vice-President. 



76 RAILROAD BONDS AND NOTES 

(e) Direct obligation of the railroad (issuing) 
company; stockholders, officers or directors 
not liable. 

The issuing company promises to pay the princi- 
pal and interest of the bonds according to their terms 
and tenor; this makes it the direct obligation of the 
issuing company as distinguished from the collateral 
obligation of a guarantor. By the direct obligation 
is meant that the railroad company is liable to pay in 
the first instance, that it owes the money directly; 
by the collateral obligation is meant that the party 
is liable to pay only when the one directly liable 
fails to do so as in the case of one company guaran- 
teeing the bonds of another. 

Many mortgages provide that no recourse shall 
be had for the payment of the principal or interest 
of the bonds, or for any claim based on them, 
against any stockholder, officer or director of the 
railroad company, either directly or through the com- 
pany. There are statutes in some of the States to 
the effect that the directors and sometimes the other 
officers of the corporation shall file annual reports, 
and for their failure to do so, certain penalties, such 
as fines or other liabilities, are imposed. It is 
against such and similar statutory penalties that it 
is thus agreed that the holders of the bonds or cou- 
pons shall not have recourse. 

However, should any officer or director act fraud- 
ulently or wilfully neglect his duties, and the bond- 



MORTGAGE OR DEED OF TRUST 77 

holder be injured thereby, he may then, notwith- 
standing these provisions, have his action against the 
offending officer or director. And the fact that the 
bond may expressly give him such rights adds noth- 
ing as he has this remedy without the provision to 
that effect. 

(f) Property is transferred to the trustee to se- 
cure the bonds, etc., upon conditions, etc. 

The mortgage conveys to the trustee the property 
that is pledged to the payment of the issue. A de- 
tailed statement of the property is set forth in the 
mortgage. 

This property is conveyed to the trustee absolutely, 
but this absolute conveyance is later qualified in the 
mortgage by a provision that the property shall be 
held by the trustee in trust and upon certain condi- 
tions there mentioned. 

This trusteeship thus created is to the effect that 
the trustee shall hold the property and exercise his 
rights and remedies in relation thereto, in behalf of 
the bondholders under the mortgage, and as the rail- 
road company still has some interests in the prop- 
erty, with due regard to such interests. 

The conditions upon which the trustee takes the 
property under the mortgage are that if the railroad 
company shall pay the principal and interest on the 
bonds and perform all its other obligations which it 
has assumed under the terms of the mortgage and 



78 RAILROAD BONDS AND NOTES 

the bond, then the conveyance of the property to 
the trustee falls and it once more belongs absolutely 
to the railroad company. 

(g) The railroad company remains in possession 
of the mortgaged road, and other property, 
except securities, and agrees to keep same in 
proper condition, etc. 

When stocks, bonds, or other securities, are con- 
veyed by the mortgage as security, they are delivered 
to the trustee; he holds them for the purposes of the 
trust created by the mortgage. 

The voting power on the stocks thus deposited 
with the trustee is arranged for in the mortgage; 
the disposition of the dividends on such stock is also 
provided for in the mortgage as is also the interest 
on such bonds, notes, or other interest bearing se- 
curities that have been thus deposited. 

The usual provision is that the railroad company 
shall vote the deposited stock and receive all divi- 
dends thereon, and the interest on the interest-bear- 
ing securities, until it defaults under the mortgage; 
that after it defaults the trustee shall exercise the 
voting power on the deposited stock and shall then 
also receive all dividends thereon, and also the inter- 
est on the interest-bearing securities that have been 
deposited. 

Where real estate and personal property, other 
than securities, are conveyed to the trustee by the 



MORTGAGE OR DEED OF TRUST 79 

mortgage, it is usually provided that the railroad 
company shall continue in possession and use the 
same until it defaults under the mortgage, but upon 
such default the trustee shall be entitled to physical 
possession of such property to realize on it for the 
payment of the sums due under the mortgage. The 
railroad company is also granted the right to take 
and to use the income of the road during the time 
it thus operates and until the default. 

This exemplifies the difference between the ordi- 
nary pledge and mortgage. In the case of a pledge, 
the property passes from the pledgor into the posses- 
sion of the pledgee, to be held by him until the 
pledgor pays the money due or performs such other 
acts to secure which the property has been pledged. 
Should the pledgor fail to pay or to do the other 
acts thus secured, then, upon his default, the pledgee 
sells the property and reimburses himself out of the 
proceeds for any loss he may have sustained. 
Should the pledgor pay the money due or perform 
the acts required, then the pledged property is re- 
turned to the pledgor. In a pledge the property 
must actually pass. The pledgee must have actual 
possession. Under a mortgage, the property is also 
charged with specified obligations, and the title and 
possession are also conveyed to the mortgagee (the 
trustee) to whom the property is pledged; but it is 
invariably provided that though the title and owner- 
ship of the property thus pass, the right to the posses- 



8o RAILROAD BONDS AND NOTES 

sion and the use of certain property shall continue 
in the mortgagor (the railroad company) until it 
defaults. 

A mortgage is then a pledge in which the posses- 
sion does not pass to the mortgagee; it is a dead 
pledge. The literal meaning of the word "mort- 
gage" is "dead pledge." The word is derived from 
the French words "morf (dead) and ''gage'' 
(pledge). 

That the mortgaged property shall not lose its 
value, the railroad company agrees in the mortgage 
to keep the property in good repair, and as part of 
the operating expenses of the road to make all neces- 
sary and proper improvements and betterments. 

It is quite often provided that when a certain pro- 
portion (usually about one-third) of the holders of 
the outstanding bonds shall request the trustee to 
demand of the railroad company, that the railroad 
company shall thereupon supply a report from its 
chief engineer as to the physical condition of its 
property and equipment; or, if the trustee so elects, 
he may have such property and equipment examined 
by an engineer of his own selection. Should the 
mortgaged property and equipment upon such exam- 
ination be shown not to be in good repair and condi- 
tion, then the railroad company shall within a speci- 
fied time (usually ninety days), put the same in a 
proper condition. Failure to do so, it is usually pro- 
vided, is such a breach of the mortgage as will en- 



MORTGAGE OR DEED OF TRUST 81 

title the trustee to enter into possession of the prop- 
erty and sell the same, or to foreclose the mortgage. 
If the railroad company were merely permitted to 
use the property as it was at the time of the giv- 
ing of the mortgage, even though kept in good re- 
pair, it would soon deteriorate unless replaced by 
new parts or improved along the lines of the most 
recent development for efficient operation. The 
railroad company is therefore permitted, upon the 
consent of the trustee, to sell, alter, or remove 
any building, fixtures, machinery, or appliances, 
which cannot be advantageously used in the judi- 
cious operation and management of the road, upon 
condition that it shall replace the property so sold 
or removed with other property of equal value and 
which shall immediately become subject to the mort- 
gage; or that the railroad company shall pay to the 
trustee the appraised value of such property. The 
trustee holds such money so paid him for the se- 
curity of the bondholders until it is used to replace 
such property ; or the mortgage may provide that the 
trustee shall purchase with such money bonds se- 
cured by the mortgage, and that thereupon these 
bonds so purchased shall be canceled, the mortgage 
debt thus being reduced correspondingly to the re- 
duction of the security. 

When stocks, bonds, or other securities are de- 
posited with the trustee under the mortgage, it is 
usually provided that should they fall below the 



82 RAILROAD BONDS AND NOTES 

value at which they were accepted as security under 
the mortgage, the trustee shall demand, and upon 
such demand the railroad company shall replace 
them by others, or that it shall deposit additional 
securities to keep the aggregate amount of deposited 
securities at the value at which they were originally 
accepted. 

(h) Insurance against loss by fire, etc. 

To secure such of the mortgaged property from 
loss as is liable to be injured or destroyed by fire, 
the railroad company agrees, in the mortgage, that 
it will insure such property in a solvent fire insur- 
ance company to be approved by the trustees. In 
case of loss, payment of the insurance money is made 
to the trustee. 

The trustee holds such insurance money as a 
substitute for the property that has been destroyed 
or damaged. But property necessary for the suc- 
cessful operation of the road cannot be dispensed 
with. Insurance money in the hands of the trus- 
tee held at the expense of property necessary to 
maintain the road interferes with the productiv- 
ity of the road. Railroad mortgages, therefore, 
quite generally provide that the damaged or de- 
stroyed property, when feasible, shall be repaired or 
replaced with the insurance money. The railroad 
company accordingly proceeds to repair, reconstruct 
or replace the property injured or destroyed. As 



MORTGAGE OR DEED OF TRUST 83 

this work progresses, the trustee pays over to the 
railroad company, from time to time, out of such 
insurance money, sums equal to that expended by 
the railroad company in such work, when such ex- 
penditures represent the actual value of the work. 

(i) Description of the mortgaged property. 

The mortgage must specifically mention the prop- 
erty it pledges as security. The lien of the mort- 
gage does not attach to any property that is not 
included within its terms. 

The usual railroad mortgage conveys the land, 
rolling stock, property, franchises, rights of way, all 
appurtenances, buildings, structures and improve- 
ments of the railroad company. And when stocks, 
bonds, or other forms of securities are included they 
are set forth in a detailed list. The mortgage may 
also contain the "after acquired property" clause, 
by which it is intended to include in the mortgage 
such property as the railroad company may acquire 
at any future time during the life of the mortgage. 
The income of the road is not included in a mort- 
gage by implication; to include it it must be spe- 
cifically mentioned. 

Should income be included in a mortgage, the 
railroad company is entitled to all its income while 
in control and operation of the road. It is entitled 
to these moneys, notwithstanding that they are in- 
cluded in the mortgage, until it defaults under some 



84 RAILROAD BONDS AND NOTES 

of the terms of the mortgage and the receiver takes 
possession under order of the court or the trustee 
demands possession under the mortgage. This is 
the law in the absence of any agreement to the con- 
trary. The mortgage may, though it is unusual, 
contain a provision that the income, earnings, and 
profits received by the railroad company while it is 
in possession and operates the road, shall be consid- 
ered as held by it in trust for the bondholders. 

Any income included in a mortgage is held to 
mean net income; that is, the income after all ex- 
penses necessary to produce it have been deducted. 

Income only is sometimes mortgaged for the pay- 
ment of the interest only of an issue of bonds. This 
is in the case of income bonds, where the payment 
of the interest of the bonds is dependent upon the 
fact that the income has been earned during that 
interest period. See Income bonds^ etc. Page 329. 
The mortgage by a railroad company of "all its 
right, title and interest" in the rolling stock and 
equipment used by it, as is sometimes done, suggests 
the inquiry as to what right, title and interest it has 
in such rolling stock or equipment; whether or not 
it owns it and what liens it is subject to; or if it is 
being used under a lease or car trust arrangement. 
See Car trust certificates or bonds. Page 316. Also 
see Equipment trust certificates or bonds. Page 
316. 



MORTGAGE OR DEED OF TRUST 85 

(j) After acquired property. 

In addition to such property as is specifically 
named in the mortgage and which the railroad com- 
pany owns at the time the mortgage is executed, 
there may be included also such property as the com- 
pany might acquire at some future time during the 
life of the mortgage. 

The lien of the mortgage attaches to such after 
acquired property whenever the railroad company 
acquires it. 

The intention of the after acquired property clause 
in railroad mortgages is usually to impress the lien 
of the mortgages upon such property as may be sub- 
stituted or added to equip the road with modern 
appliances as well as to replace worn out parts with 
new material. 

This clause, however, may be construed to cover 
all property that the railroad company might ac- 
quire at any future time during the lif^e of the mort- 
gage, that is, property of a different nature and 
under different circumstances than just mentioned. 
How far reaching an effect the courts will give to 
this clause depends upon its language. 

The lien of the after acquired property clause, 
under all circumstances, attaches to the after ac- 
quired property in the condition that it comes into 
the possession of the railroad company. If there 
are any mortgages or other liens against it at the 



86 RAILROAD BONDS AND NOTES 

time the railroad company receives it, they take 
precedence and priority over the lien of the mort- 
gage containing the after acquired property clause. 

Railroad mortgages have the tendency not to in- 
clude the after acquired property clause; at any rate 
not to have one that is so broad that it may em- 
barrass, if not prevent, it from acquiring a branch 
line or an extension, or other property, when it was 
not really the intention that property of this kind 
should be included in the mortgage. 

But this embarrassment is sought to be avoided, 
when property of the kind just mentioned is ac- 
quired and the after acquired property clause is 
broad enough to include it, by taking such prop- 
erty subject to as large a purchase money mortgage 
as possible; or by leasing instead of purchasing it; 
or, when the property is rolling stock, by taking it 
under the "car trust" arrangement; or, when it is a 
branch line or extension, by incorporating a separate 
company and taking the property in the name of 
such new corporation, organized for that purpose 
only. Rolling stock and equipment is also some- 
times taken under this plan of a separate corpora- 
tion holding the title to it. 

(k) The railroad company agrees to preserve the 
lien of the mortgage. 

The railroad company also agrees in its mortgage 
that it will pay all taxes, water rates, assessments, 



MORTGAGE OR DEED OF TRUST 87 

and governmental charges lawfully imposed on the 
property. 

Taxes, and charges of that character, are a lien 
against the property of the road superior and prior 
to all mortgages, no matter when they accrued. 

The company, therefore, agrees to discharge all 
such claims, and also such other claims, the lien of 
which might be given a preference over the lien of 
the mortgage. Under this heading, and contem- 
plated by such a provision, are claims for operating 
expenses and other indebtednesses entitled by law to 
a preference. See Operating expenses prior to re- 
ceivership. Page 245. 

The failure of the railroad company to discharge 
liens and claims of this nature would result in hav- 
ing the standing of the mortgage displaced in favor 
of such preferred liens and claims, and thus the 
priority that the bondholders enjoyed and were en- 
titled to would be lost to them. The railroad com- 
pany obligates itself, therefore, to pay all claims 
of this kind before they fall in arrears so that the 
standing and lien of the mortgage shall be preserved. 

It is usually provided, however, that the railroad 
company shall not be required to pay such taxes, 
assessments, or other claims entitled to a preference 
over the mortgage, so long as it shall in good faith 
contest their validity. And a failure to pay such 
claims will not be construed as a default if the com- 
pany is contesting them in good faith. 



88 RAILROAD BONDS AND NOTES 

(1) Execution of all papers necessary to facilitate 
the trust; waiving redemption and exemption 
laws. 

The railroad company always agrees in its mort- 
gage that it will execute and deliver to the trustee 
any legal instruments or documents that may, after 
the mortgage is executed, be necessary to carry out 
the purposes of the trusteeship. This is to insure 
full power and title in the trustee to proceed in be- 
half of his bondholders in any matter that may arise 
under the mortgage. 

Should the title as conveyed to the trustee by the 
mortgage be questioned at any time, the court will 
compel the railroad company to execute all legal 
instruments needed to vest in the trustee such title 
as may be necessary for him to fully protect the 
rights of his bondholders under the mortgage and 
to carry out his trusteeship. 

And to further facilitate the trustee in pur- 
suing his remedies, the railroad company usually 
agrees in its mortgage not to apply for or avail 
itself of any appraisement, valuation, stay, exten- 
sion, exemption or redemption laws that may prevent 
or interfere with the entry of the trustee into posses- 
sion and his operation of the road or his proceeding 
to foreclose the mortgage, and expressly waives the 
benefits of such laws. 

And as a further aid in the enforcement of the 
security afforded by the mortgage, the railroad com- 



MORTGAGE OR DEED OF TRUST 89 

pany consents, so far as it can, to the appointment 
of a receiver, when the trustee applies to the court 
for a receivership. And it further consents, usually, 
that the trustee shall receive the income of the mort- 
gaged premises and property during such legal pro- 
ceedings. 

(m) Rights, remedies, powers and liabilities of 
the trustee, etc. ; trustee's certificate. 

Throughout the railroad mortgage, certain rights 
and remedies are conferred, and certain duties are 
imposed on the trustee in favor of the bondholders; 
and he is there given power to perform certain acts 
for their protection which the law does not ordi- 
narily give him. Apart from what the bond or the 
mortgage may say in this respect, the law imposes 
on the trustee certain duties growing out of the trust 
relation that exists between him and the bondhold- 
ers. 

It is the duty of the trustee to protect his bond- 
holders and realize on the security for them. Ac- 
cordingly, he must proceed at once to enforce the 
remedies that the law and the mortgage give him to 
protect the rights of his bondholders. But the mort- 
gage usually modifies immediate action by providing 
that the trustee shall proceed with regard to cer- 
tain remedies only when requested to do so by the 
holders of a certain proportion of the bonds then 
outstanding, or that he need not proceed until he 



90 RAILROAD BONDS AND NOTES 

has been properly indemnified against any loss he 
might sustain or liability he might incur in carry- 
ing out any of these special remedies in behalf of 
the bondholders. 

To protect the holders of an issue of bonds against 
an over-issue, or a fraudulent issue, the mortgage 
provides that the trustee shall authenticate each bond 
of the issue with his certificate; any bond issued 
without such certificate is void and is not entitled 
to the benefits of the mortgage securing the issue. 
Such bond cannot be enforced. Should the trus- 
tee's certificate be forged the bond is void and not 
entitled to the benefits of the mortgage. For form 
of trustee's certificate see Page 75. 

After he certifies them the trustee may put out 
the bonds himself; or he may return them, after 
certification, to the railroad company to be put out 
by it. He may put them out or turn them over to 
the railroad company, as the case may be, all at 
once, or in certain portions or allotments, at such 
times and in such quantities or amounts as the mort- 
gage shall provide. 

The rights and remedies of the trustee under the 
mortgage and under the law, with the duties and 
obligations growing out of his trusteeship, due to 
the very nature of that relationship, are more 
fully discussed in the next chapter. See Chapter 
IV. Rights and Remedies with Relation to the 
Trusteeship. Page 116. 



MORTGAGE OR DEED OF TRUST 91 

(n) Provisions as to pa5mient of principal and 
interest; free from all taxes; gold coin. 

The railroad company agrees in the bond and the 
mortgage to pay each instalment of interest, and the 
principal of the bond, and each instalment of prin- 
cipal, when they respectively fall due. 

It also usually agrees to pay these sums without 
reduction from principal or interest for any taxes, 
assessments and governmental charges that may be 
imposed upon the bond or the interest, which the 
company may be required to deduct therefrom. 
This provision includes payments under the income 
tax law. The holder of the bond or coupon, as the 
case may be, receives his interest in full without any 
deduction for the tax, the railroad company, being 
liable therefor, makes the payment to the govern- 
ment officials. 

In the absence of any provision to the contrary, 
immediately upon the default of the railroad com- 
pany in the payment of any instalment of interest, 
or of an instalment of principal, or the perform- 
ance of any of its obligations under the mortgage, 
the railroad company is in default and the remedies 
that the trustee has at his command may be enforced 
against the mortgaged road and property. See 
What constitutes a default. Page 148. In the so- 
called ''Gold Bonds" the issuing company agrees 
in its bond and mortgage to pay the bonds and in- 
terest or the coupons, in the case of coupon bonds, 



92 RAILROAD BONDS AND NOTES 

in gold coin of the United States of America, of or 
equal to the standard of weight and fineness at the 
time of the issue. The holder may then insist upon 
such payment. 

(o) Priorities, if any, between principal and in- 
terest; canceling paid coupons. 

It is usually provided in railroad mortgages that 
they shall secure the payment of the principal and 
the interest of all the bonds issued under it, without 
preference or priority, and equally and ratably. 
However, a different arrangement may be made in 
distributing the proceeds of the mortgaged property, 
and interest may be preferred in payment over prin- 
cipal; or the different instalments of interest may 
be preferred in payment according to the dates on 
which they respectively fell due; or some other ar- 
rangement may be properly included in the mort- 
gage. See also Priorities between interest coupons 
and claims for interest. Page 260. 

Where there is nothing said in a mortgage about 
priority, all claims under it for principal and inter- 
est share proportionately. 

Railroad mortgages usually provide that when the 
interest coupons are paid they shall be surrendered 
and canceled. Should paid coupons be allowed to 
remain uncanceled, there is danger that they may 
be negotiated again and their holder seek the pro- 
tection of the security in conflict with the holders 



MORTGAGE OR DEED OF TRUST 93 

of the unpaid coupons and the bonds. The coupons 
are either paid by the trustee or under his supervi- 
sion; and he protects the bondholders by seeing that 
such paid coupons are canceled. The provision is 
also added in the mortgage that all coupons matur- 
ing before the delivery of the bonds shall be cut 
off and canceled before such bonds shall be put 
out. 

(p) Sinking fund arrangement. 

The sinking fund arrangements that are included 
in railroad mortgages vary according to the objects 
that are to be attained. The basic idea of all sink- 
ing funds plans is to set aside a specified sum 
periodically, annually or semi-annually, and with it 
to buy in the bonds of the issue at stated periods, 
and thus reduce the bonded indebtedness gradually; 
or to save up, as it were, to meet the entire issue at 
maturity, in the meantime investing the fund so 
accumulated. 

The trustee owes the active duty to the bond- 
holders to see that the railroad company faithfully 
carries out the sinking fund arrangement. 

The details of the particular plan used are set 
forth in the mortgage. 

A common method that railroad companies em- 
ploy to create and maintain the sinking fund is 
that by which it agrees to turn over to the trustee at 
designated times (usually annually or semi-an- 



94 RAILROAD BONDS AND NOTES 

nually) either a fixed sum; or a certain proportion 
of its gross earnings or net income, or other specified 
source of income or revenue; or an amount equal to 
a specified proportion of the amount of the out- 
standing bonds. 

If the plan is to meet the entire issue at maturity, 
the trustee usually takes the money so received from 
the railroad company, and invests it in interest bear- 
ing securities. With the interest from these invest- 
ments, the arrangement may provide that he shall 
pay the interest on the bonds, or, the provision may 
be that the railroad company shall pay the interest; 
or the plan may provide that the trustee shall re- 
invest such interest as he shall receive, from time 
to time, and accumulate the same which also shall 
be used to meet the bonds at maturity. 

The trustee must watch the securities in which the 
sinking fund is invested, and when any depreciates 
appreciably in value, he must see that it is replaced. 

The arrangement may be that by which bonds of 
the issue are called in periodically, the trustee then 
buys them up with the moneys so received for that 
purpose; and after purchase usually holds them as 
against the railroad company as if they had not been 
paid off. The bonds thus purchased and held by 
the trustee continue to draw interest; this interest 
is received by the trustee and used by him to buy 
in more bonds for the sinking fund. The mortgage 



MORTGAGE OR DEED OF TRUST 95 

continues to secure such bonds so purchased and held 
by the trustee. 

A failure on the part of the railroad company to 
maintain the sinking fund according to the terms of 
the mortgage is a default and entitles the trustee 
to enforce the mortgage. A provision may be con- 
tained in the mortgage, and it usually is, that a de- 
fault of this kind shall continue for six months be- 
fore action shall be taken on it. 

When the sinking fund arrangement or plan is 
that a specified proportion of the bonds shall be paid 
off at designated periods, until the entire issue has 
been gradually retired, the question presents itself: 
Which bonds shall be paid off? The course usually 
pursued, and the plan that most railroad mortgages 
contain, is that the trustee shall buy the specified 
number or proportion of the bonds in the open mar- 
ket at a price not to exceed that fixed in the mort- 
gage; but before buying in the open market the 
trustee must, under the terms of such plan, give the 
bondholders of that issue a reasonable opportunity 
to first offer their bonds to him. He notifies the 
bondholders by advertisement in the newspapers, 
that he has received a certain sum for the sinking 
fund to purchase the bonds at a price not to exceed 
the price mentioned in the mortgage and invites 
them to present their bids on or before a designated 
date. Such bid must specify the price at which 



96 RAILROAD BONDS AND NOTES 

the holder will sell. The trustee reserves the right 
to reject any part of the offer should more be ten- 
dered than there is money. 

When the bids are opened, the bonds offered at 
the lowest price are accepted and such bonds are 
paid off and held by the trustee under the terms of 
the sinking fund plan. 

If the trustee cannot buy at the price the mort- 
gage limits him to, neither in the open market nor 
through advertising, then he shall call in and pay 
off the necessary number or amount or proportion 
of bonds and pay them the amount or price stipu- 
lated in the mortgage. He calls them in by draw- 
ing by lot. 

The manner of drawing is fixed in the mortgage. 
It usually takes place at the office of the trustee; 
though another place may be designated. 

Bondholders are entitled to receive notice of what 
bonds have been called in for the sinking fund. 
Such notice is usually given by the trustee at the 
expense of the railroad company, by advertising in 
newspapers of general circulation in a city of recog- 
nized importance as a money center. Such notice is 
also published in newspapers in the city where the 
railroad company has its principal office. 

The notice is usually published once a week for 
a few consecutive weeks. It states the numbers of 
the bonds that have been drawn for the sinking fund 
and retirement, and thus identifies them. If any of 



MORTGAGE OR DEED OF TRUST 97 

the drawn bonds be registered, the registered owner 
is entitled to a similar notice to be mailed to his 
address as given on the registry books, within a rea- 
sonable time prior to the date fixed for its retire- 
ment. 

The effect of having a bond drawn for the sink- 
ing fund is that the holder of such bond must sur- 
render it, with all coupons maturing after that date, 
to the trustee for purchase by him at the price agreed 
upon in the mortgage. Should the bonds be regis- 
tered they must be surrendered with a proper assign- 
ment in writing. 

The bonds are called in on an interest day as an 
invariable rule. And the holder upon surrender re- 
ceives the price agreed upon plus the interest to that 
date. 

Should the holder not surrender his bond when 
drawn for the sinking fund, whether wilfully or 
through lack of notice or knowledge, he loses his 
right to interest from the date specified for its re- 
tirement. The bond will not bear interest after that 
date and all coupons for future interest are void. 
The bond itself, however, continues, so far as its 
principal is concerned, as a valid obligation of the 
issuing company and it is not affected by the fact 
that it was drawn for the sinking fund; except that 
sometimes it is stipulated in the mortgage that the 
bond so drawn for the sinking fund and not surren- 
dered shall no longer be entitled to the benefit of 



98 RAILROAD BONDS AND NOTES 

the security of the mortgage and its sinking fund 
after the date it should have been surrendered. 

The sinking fund arrangement by which the bonds 
may be regarded as additionally secured does not 
preclude the trustee or the bondholders from their 
other remedies, nor interfere with their other rights 
and remedies in any way. 

The wisdom of the sinking fund which takes 
periodically from the working capital of a railroad 
large sums has been questioned. The sinking fund, 
however, is absolutely needed to meet the bonds of 
corporations working mines, timber lands, or other 
enterprises in which the assets are being constantly 
depleted. The property of a railroad company in 
good standing is, as a rule, being constantly improved 
and in the course of time should afford a better 
security. 

(q) Redeeming bonds or calling bonds in. 

Sometimes the railroad company has the right, un- 
der the terms of its mortgage, to call in and pay off 
all or any portion of the outstanding issue at its own 
option. 

The period within which it may do so is then 
specified. Bonds that are payable "30-50" years 
typify this. In such an issue the bonds may be 
called in at any time from after thirty years from the 
date of issue to the time of maturity. The price 



MORTGAGE OR DEED OF TRUST 99 

that must be paid on calling in the bond is fixed in 
the mortgage. 

The holders of the bonds are entitled to a reason- 
able notice of the intention of the railroad company 
to exercise this option to redeem, to call in, or to pay 
off their bonds. The mortgage sets out in detail all 
the requirements of the notice and how and when 
it shall be served. Usually one to six months' no- 
tice is given by advertisements in the newspapers. 

The notice advises the bondholders that the rail- 
road company has elected to and will redeem cer- 
tain outstanding bonds, describing them, on a speci- 
fied date, at the price agreed upon in the mortgage, 
with accrued interest. 

The bonds are usually to be presented and paid off 
at the office of the trustee, though another place may 
be designated. After the date fixed for such redeem- 
ing, they will cease to draw interest and the coupons 
for interest accruing subsequent to that date will be 
void. 

It is sometimes stipulated in the mortgage that 
after the date fixed for their redemption, the bonds 
shall cease to be entitled to the protection of the se- 
curity of the mortgage. Though the security of the 
bonds may be thus taken from them by agreement, 
they continue as valid obligations of the issuing com- 
pany, which continues liable for the principal though 
the interest thereon may be lost from the date fixed 



100 RAILROAD BONDS AND NOTES 

for redemption. Payment or accepting other securi- 
ties in their place, or some other kind of satisfaction 
alone can discharge them. 

However, if the bonds and their coupons are prop- 
erly presented at the time and at the place fixed for 
their redemption and payment, and they are not paid 
according to the terms of the mortgage, then the inter- 
est and the coupons continue as theretofore, and the 
bonds and their interest continue to be secured and 
protected by the mortgage. 

(r) Payment of serial bonds; bonds issued in 
series. 

The uncertainty as to when a railroad bond may 
be called in for sinking fund purposes, or redeemed 
by the railroad company, with possible loss of inter- 
est and security, has been considered an objection. 
To overcome this the serial bond is employed. 
These bonds are like other bonds except that they are 
numbered consecutively, or divided into classes 
designated by letters. At a fixed time the bonds of 
the issue of a specified lettered class, or those within 
certain numbers, fall due and are paid. The price 
that shall be paid for them is fixed in the mortgage. 
Under this arrangement the holder has the advantage 
of knowing just when his bond will mature. 

Serial bonds, just discussed, are to be distinguished 
from bonds issued in series. A mortgage may secure 
an issue of bonds in an aggregate limited amount, 



MORTGAGE OR DEED OF TRUST loi 

and provide that they shall be put out in series of 
specified amounts, from time to time, at fixed periods, 
or as the needs of the railroad company shall require, 
or upon the happening of a certain event, or upon 
some mentioned condition, as the case may be. All 
bonds of such an issue fall due upon the same day no 
matter when issued or put out. They are merely put 
out and sold in series. This is the practice in the 
case of a large issue, usually under a general mort- 
gage or blanket mortgage. The proceeds of a series, 
or part of such an issue, is used usually to retire un- 
derlying liens and so to clear the way to strengthen 
the lien of the general or blanket mortgage ; the pro- 
ceeds of another series may be used to provide for 
present needs of the road ; and the balance furnishes 
the ready means to raise money in the future, without 
the trouble and expense, and possible adverse market 
conditions, of other issues at each time such money 
may be required. The entire issue is secured by the 
mortgage. 

(s) Refunding plans. 

The refunding mortgage will contain the plan 
whereby part of the money to be raised (though the 
.entire amount of the issue may be devoted to that 
purpose) shall be used to take up some prior issue of 
bonds or notes, secured by a prior or underlying 
lien. 

Railroad bonds are not paid off at their maturity, 



102 RAILROAD BONDS AND NOTES 

as a rule, in the sense that the obligation is discharged 
and no other takes its place. It is the practise to 
take up an issue of bonds or notes when due with 
bonds or notes of a new issue. The old issue is re- 
tired by being exchanged for the bonds of the new 
issue or by being paid off with the proceeds of such 
new issue. 

The bonds of such new issue are the refunding 
bonds, as they refund the old issue and so succeed, 
under their mortgage, to the lien that the latter had 
on the property of the issuing company. 

Consolidated companies use refunding issues to 
refund or meet the bonds issued by their constituent 
companies before consolidation, and secure them by a 
mortgage upon the entire system. 

The custom seems to be to make the refunding 
issue for a larger sum than the amount of the bonds 
to be met and retired. The excess is then used, quite 
generally, to meet present requirements of the road, 
for new construction contemplated, or to pay for ad- 
ditional equipment, or to provide money for future 
needs. 

The plan by which the refunding is accomplished 
is set forth in the mortgage in detail. Different 
methods may be employed. The one most common 
and most generally adopted is that by which the old 
bonds are retired in such a manner as to gradually 
substitute the refunding bonds in their place so that 
finally the lien of the mortgage securing the old bonds 



MORTGAGE OR DEED OF TRUST 103 

is discharged and the lien of the mortgage securing 
the refunding bonds takes its place. 

Under this plan of refunding, which is the usual 
one, the old bonds are presented by their holders, at 
maturity, for payment, to the trustee of the new re- 
funding mortgage, and are paid out of the proceeds 
of that new issue. Or the bonds of the issue to be 
retired are surrendered to the trustee for exchange 
for bonds of the refunding issue, when that is the 
agreement. 

These bonds of the old issue, whether the trustee 
received them by exchange for bonds of the new 
issue or paid for them with the proceeds of such new 
bonds, he holds uncanceled; and the mortgage that 
secured these old bonds continues in effect, and con- 
tinues to secure them thus in the possession of the 
trustee. 

The trustee stamps upon the face of such bonds 
thus refunded that they are payable only to him as 
trustee; and thereafter he holds these bonds in trust 
uncanceled. They are thus continued alive so far 
as the railroad company is concerned so that they, in 
the hands of the trustee, shall be secured by their 
original underlying mortgage and entitled to all its 
benefits. And the trustee as the holder in trust of 
these refunded bonds has the same rights under that 
original underlying mortgage, as any bondholder un- 
der it had. 

The trustee holds these bonds he has thus refunded 



104 RAILROAD BONDS AND NOTES 

for the protection of all the bondholders of the new 
issue. In this way the old issue is refunded bond 
for bond, and each new bond that refunds the old 
bond takes the rights of the latter, in effect, under the 
underlying mortgage. By this method of gradual 
substitution the entire issue of old bonds is met, 
refunded, and disposed of. Then the mortgage that 
secured them is canceled of record and removed, and 
the lien of the mortgage that secures the new issue 
succeeds to its place. There then is no longer need 
that the old bonds be continued alive to protect the 
new ones (so that they might claim, as was seen, the 
protection of the old mortgage), so they are de- 
stroyed by the trustee. 

Provision is also made in the mortgage that the 
old bonds held by the trustee during the progress of 
the refunding, shall not draw interest, but that the 
payment of the interest on the new refunding bonds 
shall be a payment of interest on the old bonds so 
held, until default in the payment of such interest, 
whereupon all the rights that the original holders of 
the old refunded bonds had, may then be enforced 
by the trustee, who holds them for that purpose. 
These rights that he thus gets and enforces are for 
the benefit of all the holders of the bonds of the re- 
funding issue. 

At the time of the issue of the refunding bonds all 
of the old issue may not have matured. Provision 
is then made for this by reserving sufficient refund- 



MORTGAGE OR DEED OF TRUST 105 

ing bonds to meet these old bonds as they fall due. 
However, the holders of the old bonds may consent 
to surrender them before maturity and exchange 
them for bonds of the refunding issue. Should any 
object to the retirement of his bonds before matur- 
ity, then the trustee puts aside bonds of the refund- 
ing issue to meet those of the old issue as they fall 
due, either by payment with their proceeds or by 
exchange for the bonds themselves. The holders 
of the old issue are entitled to be paid in cash and 
cannot be compelled to accept bonds of the new issue 
unless they agreed to this in some way. 

(t) Provisions for converting the bonds into the 
capital stock of the railroad company. 

The option or privilege is contained in some rail- 
road bonds or mortgages, by which the holder may 
convert his bond into the capital stock of the issuing 
company, or for such other securities as may be agreed 
upon. 

This right to convert is an incident of the bond 
and passes with it from holder to holder and may be 
exercised by whomsoever is the holder at the time 
when the stock may be demanded. This right may 
not be assigned separately from the bond. 

When the bondholder exercises this option or 
privilege and exchanges his bond for stock of the rail- 
road company, he is no longer a bondholder and 
creditor of the company, but he becomes a stock- 



lo6 RAILROAD BONDS AND NOTES 

holder and therefore a member of the debtor com- 
pany. As such he has privileges which as a bond- 
holder he did not possess, such as receiving dividends, 
voting, and having a voice in the selection of the 
corporate officers by whom the affairs of the company 
shall be managed. In the distribution of the assets 
of an insolvent road, as a stockholder he is entitled 
to his proportionate share of such assets after all the 
debts of the railroad company have been paid in full. 
The bondholders of the corporation, like other cred- 
itors, are entitled to be paid in full before the stock- 
holders receive anything. 

To become a stockholder, the stock must have been 
actually issued to him. That he demanded it and 
was legally entitled to receive it does not make him a 
stockholder. The stock must have been actually 
issued to him. 

To exercise this option or privilege the bondholder 
must surrender his bond in proper form to the rail- 
road company and make a demand for the securities 
strictly upon the terms set forth in the option. 

The time when and the price, value, or ratio, at 
which the conversion shall be made are mentioned 
in the mortgage. 

Time requirements must be strictly observed. 
And where the conversion must be made on or before 
maturity, or on or before any designated day, the 
holder must present his bond and demand his stock 
on or before the time specified else he loses his rights 



MORTGAGE OR DEED OF TRUST 167 

under his option. The courts hold that under the 
circumstances, the railroad company is entitled to 
know on or before the maturity of the bonds, or on or 
before such other day as may be specified for the con- 
version, whether the holder elects to take stock or 
money, so that the stock which is not taken may be 
sold and the proceeds applied to the payment, in 
money, of the bonds. 

Should no time be specified within which the 
holder may convert his bond, then the option must 
be exercised within a reasonable time. What con- 
stitutes a reasonable time depends upon the facts and 
circumstances of each particular case. 

The demand for the conversion must be made at a 
reasonable hour on or before the day upon which the 
option expires. 

When the option to convert is lost it is gone for- 
ever. The law holds that to extend the time, or, if 
already expired, to renew it, a new agreement is 
necessary. An extension of the time for the pay- 
ment of the bonds, when the option to convert ex- 
pired at maturity, does not of itself extend the time 
for conversion to the new date of maturity. A new 
special agreement is necessary. 

The consolidation of the issuing railroad company 
with another, or with others, cannot defeat the right 
of the bondholder to convert. The terms of the 
statute or the agreement under which the consolida- 
tion is effected cannot be forced upon him summarily. 



io8 RAILROAD BONDS AND NOTES 

He is not permitted, however, to interfere with the 
consolidation. He is entitled to a reasonable notice 
of the intended consolidation and a fair opportunity 
to exercise his rights and demand stock of the com- 
pany that issued his bond before it consolidates. 
Should he not demand his stock within the reasonable 
time that must be allowed him; or, should he by 
word or act participate in the consolidation (by which 
the issuing company loses its legal identity and power 
to issue stock), he will not be heard later to com- 
plain, and any rights he may have had to convert his 
bond into the stock of the issuing company up to the 
time of the consolidation, will cease with such con- 
solidation. 

However, the rights of the holders of bonds with 
the option of conversion are quite generally provided 
for in the arrangement for consolidation, whether by 
statute or agreement. As a general rule the consol- 
idated company assumes or has imposed upon it all 
the liabilities of its constituent companies, including 
this one of conversion; and the consolidated com- 
pany will issue its own stock to meet the demands of 
the holders of this option against the roads thus con- 
solidated or merged. 

Should the railroad company upon proper demand 
refuse to deliver the stock, the holder of the convert- 
ible bond had his election of two remedies. He may 
sue the issuing company for money damages for 
breach of this agreement; or he may compel the de- 



MORTGAGE OR DEED OF TRUST 109 

livery of the stock, when that is possible. In the first 
action, the measure of damages is the market value 
of the stock at the time it was refused, less the value 
of the bond. If the bonds are to be taken up at their 
maturity with stock, then the measure of damages is 
the market value of the stock at that time, less the 
value of the bond at that time. The suing bond- 
holder in each instance retains his bond, hence the 
deduction of its value in each case. Should he turn 
over his bond, or be ordered to do so by the court, its 
value then is considered in arriving at the amount of 
his damages. 

In the action to compel the delivery of the stock it 
is no answer for the railroad company to say that it 
had none of its stock ready and that it cannot acquire 
any except at ruinous prices upon the market. It 
should have provided against such a contingency. 
And where it is an impossibility to procure the stock, 
even at a loss to the issuing company, it must answer 
in money damages and pay the value of the stock at 
the time it should have been delivered. 

The relative price, value, or ratio at which the 
bonds shall be exchanged for stock is fixed in the 
mortgage. This is the conversion parity. When 
the convertible bond and the stock for which it may 
be exchanged are quoted at the price, value, or ratio 
fixed in the mortgage, the conversion parity is said to 
be maintained. The holder of the convertible bond 
seeking gain by the conversion, of course, watches for 



no RAILROAD BONDS AND NOTES 

the time when the conversion is in his favor, and if 
it be during the period within which he may convert, 
he then exercises his option. 

(u) Re-possession by the railroad after receiver- 
ship or possession by the trustee. 

The default of the railroad company in the pay- 
ment of interest or principal of the bonds may have 
been caused by conditions that were temporary only ; 
and after the receiver or the trustee has taken pos- 
session, it may be able to retrieve its lost standing. 
It may then be in a position to pay all that is due 
under the mortgage. It is but just that it should be 
given this opportunity to do so, and it is usually to 
the advantage of the bondholders that it should pay 
up and retake possession of the road and resume 
operation, as it thereby prevents the sacrifice that 
usually attends a forced sale of property and the 
resultant loss to the bondholders and other creditors. 

Railroad mortgages accordingly contain, without 
exception, a provision that at such a time the railroad 
company by paying all that is due under the mortgage 
and the expenses that have been incurred, shall be 
entitled to the re-possession of the road as if no de- 
fault had taken place. 

It is usually provided that the railroad company 
shall exercise this right at any time up to the actual 
sale of the property at foreclosure. 

And should the railroad company be restored to 



MORTGAGE OR DEED OF TRUST in 

possession under these circumstances and resume the 
operation of the road, it shall not affect the rights of 
the trustee or the bondholders to again take posses- 
sion of the mortgaged property or to foreclose the 
mortgage and ask for a receiver upon a subsequent 
default. 

(v) Remedies to enforce the mortgage. 

Immediately upon the failure of the railroad com- 
pany to pay an instalment of interest, or the princi- 
pal, or an instalment of principal, or to perform any 
of the obligations of the mortgage, the rights and 
remedies of the trustee in behalf of the bondholders 
to realize on the security may be enforced, in the 
absence of any provision to the contrary. To guard 
against the harm that will result in disrupting a road 
by a foreclosure, or the taking of possession by the 
trustee, when the company may be only temporarily 
embarrassed, the usual railroad mortgage provides 
that the rights and remedies to realize on the security 
shall be enforced only when the non-payment of 
interest shall have continued for a specified period, 
usually three or six months. 

The principal of the bonds must be paid when 
due and no provision for a period of grace is con- 
tained in the mortgage as in the case of interest ; the 
same rule quite generally applies to the payment of 
an instalment of principal. However, the remedies 
to enforce the security with relation to failure to pay 



112 RAILROAD BONDS AND NOTES 

principal, or an instalment of principal, when due, or 
with relation to other defaults under the mortgage, 
may be postponed by the mortgage ; the time of grace 
in each instance is mentioned. 

The trustee has no power to waive any default by 
the railroad company without the consent of the 
bondholders, unless the mortgage gives him that 
power. 

It is sometimes provided in the mortgage that the 
trustee must, upon the application of the holders of 
a certain proportion of the outstanding bonds, fore- 
close the mortgage, or pursue any of the other rem- 
edies that the mortgage may give him, as they shall 
elect; and that he may act with respect to these rem- 
edies only when empowered by the holders of the 
requisite proportion of bonds. Should there be no 
limitation upon the action of the trustee, then he 
may use his own judgment. 

The remedy that the law gives upon default by 
the railroad company, independent of any that the 
mortgage may contain, is the right to foreclose the 
mortgage and ask for the appointment of a receiver 
to take possession of the road and operate it during 
the foreclosure proceedings. The receiver then holds 
the road until a sale is had or a reorganization of the 
company is perfected. 

The railroad consents, so far as it can, to the ap- 
pointment of a receiver upon the application of the 
trustee; and it agrees in its mortgage that with rela- 



MORTGAGE OR DEED OF TRUST 113 

tion to legal proceedings instituted by others than the 
trustee, it will not suffer or voluntarily permit a 
receiver to be appointed of its property unless with 
the consent of the trustee. 

In addition to the right of foreclosure which the 
law gives independently of any provision in the mort- 
gage, the usual form of railroad mortgage confers 
on the trustee the power to sell the mortgaged prop- 
erty with or without entering into possession. 
Should he take possession of the road under such 
power granted him by the mortgage, he is usually 
permitted by the mortgage to operate the road until 
all the claims under his mortgage are satisfied and 
paid or adequately provided for. 

In granting this power to sell, or to operate and 
to sell, the mortgage usually makes its exercise de- 
pendent upon the will of the holders of a certain pro- 
portion of the bonds then outstanding; and that the 
trustee shall only exercise such powers when the 
holders of the designated proportion of the outstand- 
ing bonds shall request it. The minority are bound 
by the act of the specified majority, when the mort- 
gage contains such provision. 

The sale by the trustee under this power, is at 
public auction after due advertising and notice. 
The time and place of such sale and the kind and 
amount of advertising and notice is specified in the 
mortgage. 

As this power to the trustee to operate and to sell 



114 RAILROAD BONDS AND NOTES 

is the result of an agreement of the parties, that 
same agreement, the mortgage, specifies how he shall 
distribute the proceeds of his operation of the road 
and its sale. It is usually to the effect that he shall 
first pay the charges and expenses of the sale and of 
the trusteeship; and then if the property be sold sub- 
ject to prior liens, that he apply the balance to the 
payment of the bonds and interest under the mort- 
gage. Should the property be sold free and clear of 
all prior liens, then before he pays the bondholders 
under his mortgage he must first pay those liens 
entitled to priority over his mortgage. Besides 
those liens entitled to priority over his mortgage, he 
must pay in full all unpaid taxes, assessments and 
governmental charges before he pays his bondhold- 
ers anything. The holders of the outstanding bonds 
under the mortgage are usually paid without prefer- 
ence to whether the principal of their bonds is due 
or yet to become due. Claims for principal and in- 
terest usually stand on an equal footing; neither has 
preference over the other, though the mortgage may 
provide for priorities among the bonds and the 
coupons. See Priorities^ if any^ between principal 
and interest. Page 92. Also see Priorities among 
interest coupons and claims for interest. Page 260. 
Should the fund realized by the trustee be insuf- 
ficient to pay all the bonds and the interest coupons 
in full, when they all stand on an equal footing, they 
share proportionately. Should the mortgage provide 



MORTGAGE OR DEED OF TRUST 115 

for any preference or priority among the bonds and 
the coupons, they are paid according to the order of 
preference thus arranged. Among classes of cred- 
itors entitled to liens or other priorities, each class is 
paid in full before those of the class next in rank 
receive anything. 



CHAPTER IV 

RIGHTS AND REMEDIES WITH RELATION TO 
THE TRUSTEESHIP 

Relation between bondholders, noteholders and 
trustee generally. 

The rights and remedies of the bondholders under 
their mortgage, broadly speaking, are held and en- 
forced for their benefit by the trustee. The trustee 
represents the bondholders. The mortgage, or deed 
of trust, as it is sometimes called, is made to the 
trustee, he is the party to it and not the bondholders ; 
it is to him that the property is conveyed as security; 
the remedies to realize on the security are enforced 
primarily by him; he sees that the railroad company 
performs all it is obliged to under the mortgage, 
among other things, that the property pledged by 
the mortgage is properly cared for and conserved by 
it, that it is properly applying its income to the pay- 
ment of interest or principal of the bonds when due, 
and that these moneys are not diverted to other pur- 
poses; and it is the duty of the trustee to bring law- 
suits or to defend them to enforce or guard the inter- 
ests of his bondholders. 

While the railroad company is paying interest on 

ii6 



RELATION TO THE TRUSTEESHIP 117 

the bonds as it accrues and doing all that it should 
do under the mortgage, the duties of the trustee are 
merely passive. When there is a default by the rail- 
road company, his duties become at once active and 
decisive. He must take then such immediate steps 
as will best protect and serve the interests of his 
bondholders. The remedies that the trustee usually 
pursues are discussed in the next chapter. See 
Chapter V. Rights and Remedies with relation to 
Foreclosing the Mortgage or Otherwise Realizing on 
the Security. Page 146. 

Reasons for trusteeship. 

Railroad mortgages are made usually to secure an 
issue of bonds for large sums, offered for sale in the 
money markets of nearly every civilized country of 
the world, and held in time by persons scattered by 
residence or travel over the universe. It must be 
apparent how impracticable it would be to have each 
bondholder a party to the mortgage that secured his 
bonds. Then every transfer of a bond would re- 
quire the transfer of a corresponding interest in the 
mortgage. This would destroy that capacity of 
railroad bonds for quick and ready transfer, and de- 
prive them of that negotiability that the law, when- 
ever it can, endeavors to give them. 

By reason of frequent transfers, the holders of an 
issue constantly change. And if every bondholder 
were a party to the mortgage, originally or by reason 



ii8 RAILROAD BONDS AND NOTES 

of assignment, then all would be necessary parties to 
any suit upon the mortgage; and to have this large 
and everchanging number unite in a lawsuit would 
seriously interfere with, if not entirely prevent, the 
enforcing of the security. It is necessary, therefore, 
that one or several representatives shall be chosen to 
act for all. 

Who are chosen as trustees. 

Individuals are sometimes chosen as trustees of 
railroad mortgages. The tendency, however, is to 
name a trust company. The combination of an in- 
dividual, or a committee of individuals, with a trust 
company is sometimes employed. It seems that trust 
companies are chosen because they are better 
equipped than individuals to act as trustees of rail- 
road mortgages. Many trust companies make a 
specialty of trusteeship of this kind, and maintain 
departments conducted by men experienced and 
skilled in the peculiar nature of the work. Further- 
more, their financial resources, as a rule, are greater 
than those of individuals. 

Courts hold trustees strictly to their duties. 

Because of the delicacy of the relation that exists 
between a trustee and his bondholders, the courts 
zealously guard the interests of the latter and hold 
the trustees to strict accountability. The law de- 
mands that his conduct be characterized always by 



RELATION TO THE TRUSTEESHIP 119 

loyalty to the interests that are entrusted to him. 
He must act with care and prudence and always in 
good faith. 

Liability of trustee to his bondholders; limitation 
of liability; acts of representatives; losing 
rights against trustee; liability of trustee to 
third persons; indemnity to trustee. 

The trustee must answer to his bondholders for 
any loss they may suffer through his misconduct in 
office or failure to faithfully discharge his duties. 
Railroad mortgages usually limit the liability of their 
trustees in some particulars. Bondholders by ac- 
cepting their bonds consent to such limitations of 
liability contained in the mortgage. The usual lim- 
itation is that the trustee shall be liable to the bond- 
holders only for his own wilful default or miscon- 
duct. The trustee is held responsible usually only 
for reasonable diligence in the management of the 
trusteeship. He is not held answerable to his bond- 
holders for the wrongful act, or default, or failure 
to act, of any agent or representative, unless he did 
not use reasonable care in the selection of such repre- 
sentative. If he used reasonable care in selecting 
his employees or representatives, he is not liable to 
his bondholders for any loss sustained by their wrong- 
ful act or failure to act. 

Bondholders may lose their rights to recover dam- 
ages or for other relief against the trustee, should they 



120 RAILROAD BONDS AND NOTES 

have consented by word or conduct to the act com- 
plained of, or in any way participated in it. Such 
consent may have been given prior to the act com- 
plained of, or it may consist of a subsequent ratifica- 
tion or acceptance of the unauthorized act of the 
trustee. Those bondholders who have thus counte- 
nanced improper official acts will not be heard to 
complain against that which, in law, they have con- 
sented to. 

As to third persons, the trustee is liable personally 
to them, while operating the road, for any injury to 
their persons or their property, committed by his rep- 
resentatives or by himself. But it is invariably ar- 
ranged in railroad mortgages that the trustee shall not 
personally pay such losses, but that they shall be 
borne by the trust property, and the trust property 
is accordingly charged with a first lien in favor of 
the trustee for his security and indemnification 
against such liability. A third person continues, not- 
withstanding such an arrangement, entitled to receive 
his damages from the trustee ; the provision is for the 
reimbursement of the trustee and does not affect the 
rights of such third persons who are not parties to it. 

Many railroad mortgages provide that the trustee 
shall not be obliged to take any action to carry out 
the trusteeship, which in his opinion shall be likely 
to involve him in expense or liability, unless he shall 
be first indemnified against such expense or liability 
by the bondholders in whose behalf he shall act. 



RELATION TO THE TRUSTEESHIP 121 

Bondholders are bound by the official acts of the 
trustee. 

In representing his bondholders, the trustee binds 
them by whatever he does officially in their behalf. 
The bondholders are thus bound by the acts of the 
trustee only when he acts strictly within the scope 
of his authority as their trustee. The bondholders 
will not be bound by the acts of the trustee when he 
is acting only for the railroad company, or in any 
matter outside of the mortgage, as in reorganization 
or other collateral transactions, unless he is specifi- 
cally authorized by them. 

Remedies of bondholders against their trustee; 
money damages; injunction; removal; com- 
pelling performance of acts. 

Bondholders are entitled to sue the trustee per- 
sonally and recover such damages in money, as shall 
compensate them for any loss they may have suffered 
as a result of his improper official acts. See Liabil- 
ity of trustee to his bondholders; limitation of liabil- 
ity^ etc. Page 119. 

They are also entitled to an injunction to restrain 
any act of the trustee that will waste or impair the 
property that may come into his possession under 
the mortgage. And when his acts imperil the safety 
of the property under his control, and his continuing 
in office is a menace to the interests of the bondhold- 
ers, in addition to the injunction restraining him 



122 RAILROAD BONDS AND NOTES 

from acting further, they are entitled to ask the court 
to remove him. 

The court may compel the trustee to actually per- 
form certain acts within his duties; accordingly, 
among other things, bondholders may compel their 
trustee to take possession of the road and operate it, 
when it is his duty under the mortgage to do so. 

Co-trustees; majority; liability of co-trustees for 
acts of each other; succession by continuing 
trustee. 

Where there are two or more trustees all must con- 
cur to give validity to an official act, unless the mort- 
gage otherwise provides. Each trustee has an equal 
right in the execution of the trust and an equal power 
over the trust property. The decision of a majority 
has no force as a general proposition of law. Rail- 
road mortgages, however, usually cover this contin- 
gency and quite generally provide that the vote of 
a majority of its trustees shall decide all questions 
before them. However, when a proper expenditure 
is made the consent of co-trustees is not necessary. 

One trustee is not personally responsible to the 
bondholders for the misconduct of his co-trustee. 
Where, however, a trustee stands by and, without 
protest, permits his co-trustee to commit a fraud with 
relation to the trusteeship, and he does not take steps 
to protect his bondholders, the law declares that this 
shall be deemed an acquiescence in the wrong act, 



RELATION TO THE TRUSTEESHIP J 23 

though there be no actual participation, and renders 
him personally liable to them. 

When there are two or more trustees and a part of 
that number is removed, or otherwise incapacitated 
from acting, the rights and powers that all had pass 
to the trustee or trustees remaining. The title to 
the property under the mortgage passes to the con- 
tinuing trustee or trustees. 

Trustee may not delegate to others the powers 
requiring his individual skill; details only may 
be delegated. 

The trustee may not delegate to others the exercise 
of those powers which the bondholders are justified 
in assuming will be carried out by him. He may 
not relieve himself from performing those services 
that call for executive control and management of 
the trusteeship. With regard to such services per- 
sonal attention is the basis of his duty. 

One would not consent to have another act for him 
unless he had a certain confidence in the standing, 
talents, and general fitness of such person. His ca- 
pacity for administration, his knowledge of the af- 
fairs of the railroad company are important factors 
that influence the appointment of a trustee. Bond- 
holders are entitled to assume, therefore, that he will 
employ these qualities, talents and special knowl- 
edge for their benefit and will not delegate the per- 
formance of duties requiring this skill to others. 



124 RAILROAD BONDS AND NOTES 

Matters of detail that do not call for skill of the 
nature discussed, may be performed by subordinates 
or representatives. 

Personal interest of the trustee in the property for- 
bidden when antagonistic to bondholders ; pur- 
chase of trust property by trustee ; remedies of 
bondholders ; acceptance or rejection ; waiving 
or losing remedies against trustee. 

The law will permit no self-seeking by the trus- 
tee. There must be no fraud or collusion on his part. 
Every act of the trustee that will prejudice the inter- 
ests of the bondholders will be condemned by the 
courts. 

The trustee must not act for his personal advantage 
in dealing with the property that is the subject mat- 
ter of his trusteeship. 

There must be no clashing of his duty as trustee 
and his individual interests. Such a situation sub- 
jects the security to risk. Accordingly, the law 
forbids the trustee purchasing any part of the trust 
property for himself, without rendering himself 
liable to account to the bondholders therefor. But 
he may purchase on behalf of his bondholders at the 
foreclosure sale when authorized by them to do so. 
He then holds the property so purchased subject to 
the direction of the bondholders. 

The law recognizes human infirmity and sees the 



RELATION TO THE TRUSTEESHIP 125 

inevitable conflict between duty and self-interest. 
The vice, however, of the personal interest of the 
trustee merely taints his purchase of the trust prop- 
erty ; it does not make such purchase absolutely void. 
That is, it is optional with the bondholders whether 
or not they will accept or reject a purchase or other 
dealing with the trust property by their trustee. 
Should it be beneficial to the bondholders, they may 
accept and enforce it; should it not be to their satis- 
faction they may ask the court to declare it void. 

Until the bondholders by some act show their 
intention to avoid such purchase, or other personal 
dealing, by the trustee, it will continue in force. It 
is good until it is set aside. And the law will assume 
that the bondholders have accepted and confirmed the 
purchase, or other personal dealing, if they fail to 
object within a reasonable time. Their acquiescence 
will be inferred from their failure to object within a 
reasonable time. 

Should the bondholders reject the transaction, then 
the trustee should be put, so far as can be done, in 
the position he occupied before his purchase or other 
personal dealing with the property. The bondhold- 
ers may not cling to the proceeds of the transaction 
they seek to avoid; and the trustee should have re- 
turned to him, so far as under the circumstances it 
can be done, what he parted with when making the 
purchase complained of. 



126 RAILROAD BONDS AND NOTES 

Litigation is conducted by the trustee ; bondholders 
are then bound by decisions of the courts ; ap- 
pearance by bondholders; indemnity and de- 
mand by certain proportion of bondholders; 
when trustee loses right to litigate. 

Litigation affecting the mortgaged property is car- 
ried on by the trustee in behalf of the bondholders. 
He represents them in all legal proceedings affecting 
the trusteeship. 

Should a trustee act under several mortgages and 
should there be a contest for priority or preference 
between the different classes of bondholders under 
these several mortgages, the court will direct that 
each class be represented by a separate trustee who 
will be solely concerned in enforcing that one mort- 
gage and getting for those whom he represents all 
they are entitled to. 

Bondholders are bound by the decisions of the 
courts in legal proceedings in which they are repre- 
sented by their trustee, with the same effect as if 
each bondholder were a party to the suit. And in all 
litigation affecting the trusteeship or the trust prop- 
erty, whatever legal steps the trustee is bound by, 
generally speaking, the bondholders are bound by. 
When the trustee acts fraudulently or outside the 
scope of his authority the bondholders are not bound 
by his acts. 

Notwithstanding that the bondholders are repre- 
sented by their trustee in all litigation, they are 



RELATION TO THE TRUSTEESHIP 127 

entitled to appear before the court in all proceedings 
there pending, to ask it to protect their interests when 
necessary. 

Railroad mortgages often provide that the trustee 
shall have the exclusive right to conduct all litiga- 
tion under it, and that the bondholders shall not bring 
any legal proceedings under the mortgage, unless the 
trustee shall have failed to do so, after having been 
requested in writing by the holders of a certain pro- 
portion in amount of the bonds then outstanding. 
Some mortgages further provide that in addition to 
such request, there shall be tendered to the trustee a 
reasonable indemnity against his expenses and liabil- 
ity, before he shall be required to bring legal action. 
With such a provision in the mortgage, the trustee 
need not proceed with litigation until requested by 
the proper proportion of bondholders and, if indem- 
nity be required, until such indemnity be tendered. 

The trustee may lose his right to conduct the lit- 
igation of trusteeship. Then the courts permit bond- 
holders to litigate in all matters necessary to protect 
their rights under the mortgage, instead of the trustee. 

The trustee loses his right to litigate under the 
mortgage when he acts fraudulently or in collusion 
with others; or occupies such a position that his 
personal interests conflict with those of his bondhold- 
ers; or his attitude is hostile to their welfare. Bond- 
holders may also sue instead of the trustee when he 
improperly refuses or neglects to proceed. 



128 RAILROAD BONDS AND NOTES 

If the mortgage provides that the trustee need not 
proceed with litigation until a demand to do so has 
been served on him by the holders of a specified 
amount or proportion of the outstanding bonds, or 
that he be first indemnified against any possible per- 
sonal loss, then it must be shown that a proper de- 
mand or offer of indemnity has been made in accord- 
ance with the terms of the mortgage in that regard 
and the trustee notwithstanding has failed to pro- 
ceed. 

Bondholders may conduct litigation instead of 
trustee ; one or more sues for all ; all bound by 
decision of the courts. 

When the trustee has lost his right to represent the 
bondholders before the court, by his fraud, neglect, 
or hostile attitude, one or more bondholders, instead 
of the trustee, may conduct the litigation of the trus- 
teeship. 

Those bondholders who thus conduct the litiga- 
tion, do so on behalf of all bondholders secured by 
the same mortgage. This is on the rule of law that 
when a large body of persons have common rights 
and it is impracticable that all join and prosecute a 
lawsuit, one or more may litigate in behalf of all. 
Holders of a large issue of railroad bonds, many of 
whom reside or sojourn in different parts of the 
world, constitute such a body, and the law recognizes 
how impracticable it is to bring all together to unite 



1 



RELATION TO THE TRUSTEESHIP 129 

in a lawsuit; and, accordingly, the law will not 
allow this circumstance to unreasonably delay, if not 
defeat, their rights and remedies. 

The same situation that makes it imperative that 
the bondholders act through a trustee necessitates that 
a very large body of bondholders be represented by 
one or a comparatively small number. Their inter- 
ests are common. What affects one affects all. The 
action is brought by the few for the benefit of all. 
The decision of the court has in view and protects 
the rights of all, whether absent or present. And 
all are affected by the decision of the court, and 
bound by it, whether appearing personally in the lit- 
igation or not. 

The court will not permit those bondholders who 
are active in the litigation to gain any advantage over 
the others. The rights of all are before the court 
and it protects the interests of all. 

When one or more bondholders litigate instead of 
the trustee, then whatever rights and remedies the 
latter had to sue under the mortgage, pass to the lit- 
igating bondholder or bondholders, and are exercised 
by them for all. 

Bondholders suing on individual holdings ; recourse 
to security; provisions barring suits on indi- 
vidual holdings. 

Each bondholder may sue the railroad company on 
his bond in his own behalf without restraint of any 



130 RAILROAD BONDS AND NOTES 

kind, unless the mortgage contains a provision that 
bars his individual suit or regulates it in some way. 

A bondholder, however, by his suit on his individ- 
ual holding gains no advantage over the holders of 
the other bonds secured by the same mortgage, so 
far as the security under the mortgage is concerned; 
because, after obtaining his judgment, he is permitted 
only to satisfy it out of the property covered by the 
mortgage after the claims of the other bondholders 
have been satisfied in full, as the lien of his judg- 
ment, against that property, comes after the lien of 
the mortgage. He may satisfy his judgment, how- 
ever, from other property belonging to the railroad 
company not covered by any lien, and also out of 
property against which prior liens exist after all such 
liens have been satisfied in full. 

The right of a bondholder to bring individual suit 
on his bond is usually barred by a provision in the 
mortgage. This provision is usually to the effect 
that the rights and remedies of the bondholders under 
the mortgage shall be enforced only through the 
trustee. This is a waiver by the bondholder of his 
right to bring his individual suit in his own be- 
half. 

Should the trustee by his wrongful act lose his 
right to represent the bondholders in litigation 
affecting the mortgage, it does not mean that the 
bondholder when barred by the mortgage may then 
sue on his individual holding. 



RELATION TO THE TRUSTEESHIP 131 

Provisions in the mortgage barring bondholders 
from suing on their individual holdings do not affect 
the right, conferred by law, on one or more bond- 
holders on behalf of all to institute or defend litiga- 
tion affecting the mortgage when the trustee by im- 
proper conduct has lost the right to do so. 

Selection of the trustee; general scope of his 
powers. 

The selection of the trustee in the first instance is 
made by the railroad company. From this it should 
not be inferred that he is subject to its control or more 
friendly disposed towards it than towards the bond- 
holders. See Courts hold trustees strictly to their 
duties. Page 118. 

When the trustee accepts his office he assumes cer- 
tain clearly defined duties to all parties interested in 
the mortgage and the mortgaged property. He can 
act with relation to the trusteeship and the mort- 
gaged property only with such powers as the mort- 
gage expressly or inferentially confers, or with which 
the bondholders may clothe him by collateral con- 
sent, or with which the law grants him independently 
of the mortgage. 

The trustee has no power to waive a default by the 
railroad company in the payment of any money un- 
der the mortgage ; nor has he power to relieve it from 
doing anything it is obliged to do under the mort- 
gage; nor has he power to alter or modify any of 



132 RAILROAD BONDS AND NOTES 

the terms of the mortgage. He has no powers to 
recognize subsequent and inferior liens and give them 
rank equal or superior to that of his mortgage. The 
trustee may only do those things just mentioned 
when the mortgage gives him that power or the bond- 
holders specifically consent thereto. 

Duties of the trustee generally; duties before de- 
fault; duties after default; the remedies he 
pursues. 

Railroad mortgages contain many provisions reg- 
ulating the trusteeship and prescribing the duties of 
the trustee. His duties are governed largely by the 
terms of the mortgage, and any subsequent agree- 
ment to which he is a party. In addition to those 
duties thus imposed on him, by agreement, he is 
subject also to those duties that the law imposes on 
trustees who have undertaken a trusteeship involv- 
ing the peculiar relations that exist between holders 
of railroad bonds and the trustee of railroad mort- 
gages and which affect railroad property. 

While the railroad company is paying interest and 
doing all it should under the mortgage, the duties of 
the trustee are merely nominal. They are limited to 
certifying the bonds of the issue, seeing that the 
interest is paid and keeping the property covered by 
the mortgage under observation so that it will not be 
wasted. When there is a default by the railroad 
company, his duties become active and he should take 



RELATION TO THE TRUSTEESHIP 133 

immediate steps to protect the rights of his bond- 
holders. 

The trustee, generally, has at his command three 
remedies to pursue in behalf of his bondholders. 
One of these he adopts. 

(1) He may take possession of the mortgaged 
property (which is usually the entire road or an 
entire branch or line) when the mortgage gives him 
that power, and operate it until the money due under 
his mortgage is either paid or adequately provided 
for; and, if necessary, he may sell the property he 
thus acquires, and satisfy the claims under the mort- 
gage out of the proceeds. This is a remedy that he 
does not possess as a matter of law, he may only 
pursue this course when the mortgage gives him that 
power. 

(2) Another remedy that the trustee does not 
possess unless the mortgage expressly gives it is the 
power to sell the mortgaged property at public auc- 
tion, without entering into possession or operating it. 
This and the preceding remedy (where he does enter 
into possession and operate) are usually granted 
trustees by railroad mortgages. 

(3) The third remedy and the one which the 
trustee usually adopts in preference to the others is 
that which the law gives him independently of the 
mortgage, that is, the right to foreclose the mortgage. 
Trustees invariably resort to this remedy as the oper- 
ation of the railroad or its sale by a trustee imposes 



134 RAILROAD BONDS AND NOTES 

upon him new responsibilities which, as a rule, they 
seek to avoid. Trustees, therefore, usually place the 
entire matter before the court for its action by fore- 
closing the mortgage. The court then, in a proper 
case, appoints a receiver, who, under its direction, 
takes possession and control of the mortgaged road 
and property and operates it until it is sold at the 
foreclosure sale or until the railroad company is re- 
organized and such property is taken over. 

Discretion of the trustee in carrying out details of 
the trusteeship. 

The trusteeship of a railroad mortgage involves 
many details. It would be impracticable for the 
trustee to seek the advice or permission of the court 
or the bondholders with relation to each detail. To 
cloak the trustee with a reasonable discretion in per- 
forming acts of this character is a necessity of the 
situation. And the bondholders by accepting him as 
their trustee, thereby expressing their faith and con- 
fidence in him, justify the law in permitting him to 
act according to his best judgment in carrying out 
such details. However, this discretion is not an arbi- 
trary one. And no matter how wide a discretion 
may be given a trustee, it is subject always to review 
by the courts on the inquiry as to whether or not he 
has abused, violated, or over-reached, his discretion. 
It is difficult to state even the nature of those acts 
which the trustee may perform according to his dis- 



RELATION TO THE TRUSTEESHIP 135 

cretion, and those to perform which he must first 
obtain pemiission of the court, the bondholders, or 
other interested parties. The decision of this ques- 
tion depends entirely upon the facts and surrounding 
circumstances of each case presented; and each case 
has its own particular facts. 

Trustee seeking advice of court; advising with 
legal counsel ; guided by opinion of bondhold- 
ers ; rights of majority ; rights of minority. 

In the course of the trusteeship under a railroad 
mortgage, situations may arise that are not provided 
for in the mortgage; or the trustee may be met with 
conditions upon which his duty is doubtful; or ques- 
tions of unusual difficulty may present themselves. 
The trustee should then apply, as a general rule, to 
the court for its aid and direction. 

Railroad mortgages may provide, and they usually 
do, that the trustee may advise with legal counsel, 
and the opinion of the latter shall be a full protec- 
tion and justification to the trustee for his acts in 
good faith and in accordance with such opinion and 
advice. 

The trustee may also seek the advice of the bond- 
holders. The trustee is not justified in following the 
advice or will of the majority, no matter how large, 
unless the mortgage states that the voice of such 
majority shall prevail. The trustee must act for the 
bondholders as a class, and not for a majority of that 



136 RAILROAD BONDS AND NOTES 

class. In some of the railroad mortgages it is pro- 
vided that the will of the holders of a majority, or 
a majority of a specified proportion or amount, of 
the outstanding bonds under the mortgage, shall con- 
trol with regard to those certain matters which are 
there clearly specified. 

In such case the minority will not be heard to 
oppose what they have consented to. Each bond- 
holder when he accepted his bond agreed to its terms 
and all the provisions and conditions of the mort- 
gage accompanying it, and, in this particular, gave 
to the majority the power to speak for him. Should 
the mortgage not contain such provision, the ma- 
jority do not have this power; it must be expressly 
granted by the mortgage in plain terms. 

However, when the mortgage does not confer this 
power on the majority, it is not improper that the 
trustee be guided by the opinion of the majority, 
when what they advise is not inconsistent with the 
provisions of the mortgage and is urged in good 
faith. But the will of the majority cannot be forced 
under these circumstances upon the minority and, 
upon their objection, the court will examine into the 
proposed action of the trustee. If the proposed plan 
of the trustee be fraudulent or if it violates any of 
the rights of the minority, the court will prevent it 
by injunction; but, where the proposed action of the 
trustee under the advice of the majority is fair and 
does not violate any of the provisions of the mort- 



RELATION TO THE TRUSTEESHIP 137 

gage, the court will permit the trustee to carry out 
such suggestions of the majority. 

The action of the court in the situation just dis- 
cussed is founded upon the peculiar relation that 
exists between the holders of bonds issued by a rail- 
road corporation, a quasi-public corporation. 

Removal of trustee ; by bondholders ; by court ; for 
cause. 

The trustee may be removed by the court for mis- 
conduct in office. 

Should the trustee prove unsatisfactory or unde- 
sirable, railroad mortgages usually provide for his 
removal by the bondholders, though no reason may 
exist such as the court requires before it will remove 
a trustee. Such a provision is usually to the effect 
that the trustee shall be considered removed from 
office when the holders of a certain proportion of the 
outstanding bonds (usually more than a bare ma- 
jority) shall file a writing, showing the amount of 
their respective holdings and their desire to remove 
the trustee. Thereupon he is removed from office 
and may not act further. 

Where the mortgage makes no such provision for 
the removal of the trustee by the bondholders, or the 
requisite holdings do not unite under such a pro- 
vision he may be removed by the court, but for cause 
only. 

The cause for removing a trustee, generally speak- 



138 RAILROAD BONDS AND NOTES 

ing, is a breach by him of some duty of his trustee- 
ship. Such breach may be the doing of an act which 
he should not do, or failing to do something he 
should do. 

The wrongful act or omission to act must be such 
as endangers the rights of the bondholders he repre- 
sents or jeopardizes the security. Should his con- 
tinuing in office be detrimental to the interests of the 
bondholders he may be removed. 

The good faith of the trustee is often a matter that 
the courts consider upon an application for his re- 
moval. A mere error in judgment is not cause for 
his removal, unless it shows want of capacity or in- 
dicates dishonesty. In this relation railroad mort- 
gages usually provide that the trustee may advise 
with legal counsel, whose opinion shall be a full pro- 
tection and justification for the trustee for any act 
done in good faith and in accordance with such 
opinion. 

The trustee may be removed for having a per- 
sonal interest in the property, the subject matter of 
the trusteeship, antagonistic to that of his bondhold- 
ers. The rigid rule that the trusteeship must be 
managed solely for the benefit of those in whose be- 
half it is undertaken is never relaxed. 

Neglecting to give his personal attention to his 
duties is ground for removing a trustee. However, 
this relates only to the general executive control of 
the affairs of the trusteeship that calls for the skill 



RELATION TO THE TRUSTEESHIP 139 

and capacity of the trustee, and not to matters of de- 
tail which may be performed by a subordinate or 
other representative. Foreign residence by a trus- 
tee, permanently and often temporarily, where it 
renders the full discharge of his duties doubtful, may 
be cause for his removal. 

Any fraud or connivance on the part of the trus- 
tee subjects him to removal. He must act always 
in the highest faith and pursuant to his honest and 
disinterested judgment. 

Resignation by trustee. 

When the trustee accepts his office he assumes all 
its obligations and may not avoid its responsibilities 
by resigning or refusing to act unless with the con- 
sent of the railroad company and of the bondholders, 
or by order of the court. 

Provisions for resignation by trustee; filling va- 
cancies in the trusteeship. 

Railroad mortgages, however, usually provide for 
the resignation by the trustee and for filling the va- 
cancy thus created. When the mortgage does not 
provide for the resignation by the trustee and the 
appointment of a new one in his place, it may be 
done only on the consent of the bondholders and the 
other parties interested, or by order of the court. 
The court has the power to appoint a new trustee. 

When the trustee is permitted by the mortgage 



140 RAILROAD BONDS AND NOTES 

to resign, it is usually provided that he shall give 
notice of his intention to the bondholders and to the 
railroad company, by advertisements in the news- 
papers, and shall, if requested, execute and deliver 
to his successor any legal documents necessary to pass 
the trusteeship on. Ordinarily, such documents are 
not necessary, as it is usually provided in the mort- 
gage that the new trustee upon taking office shall be 
possessed of all the rights of the former trustee, and 
that the latter shall become divested immediately of 
such rights upon his being separated from office. 

The court will not allow a trusteeship to fail or to 
be neglected for want of a trustee or the misconduct 
of a trustee. This power of the court does not de- 
pend upon any provision of the mortgage; it is a 
power that is inherent in a court of equity. 

Should the mortgage arrange for the appointment 
of a new trustee, the court will make the appoint- 
ment thus agreed upon. The agreement of the par- 
ties in this regard will govern the appointment and 
not the general law. 

The modes adopted by these agreements to fill 
vacancies in the trusteeship, whether contained in the 
mortgage or subsequently made, take various forms. 
Those most common, and of which one is followed, 
are that the new trustee shall be selected by the hold- 
ers of a majority, or other proportion, in amount of 
the bonds then outstanding; or that the railroad com- 
pany shall appoint the new trustee ; or that a certain 



RELATION TO THE TRUSTEESHIP 141 

court shall make the appointment; or where there 
are several trustees that those remaining, either 
unanimously or by a majority vote, as the case may 
be, shall name their new associate. 

It is also provided sometimes that in the interval 
between when the vacancy occurs and the new trus- 
tee assumes office, the duties of the trusteeship shall 
be performed by one selected by the board of direc- 
tors of the railroad company. 

The qualifications that the new trustee shall pos- 
sess are often specified. The usual requirements are 
that the new trustee shall be a trust company of good 
standing with a specified capital surplus and undi- 
vided profits and doing business in a certain city or 
state; or that he be a bondholder. 

Compensation of the trustee ; fixed by mortgage or 
agreement or by the court. 

A reasonable compensation is paid to the trustee 
for his services in the execution of his trusteeship. 
His compensation may be fixed in the mortgage or 
by another agreement between all the parties in in- 
terest. When there is litigation and the affairs of 
the trusteeship are before the court, it then fixes the 
amount of the trustee's compensation. 

The court in allowing compensation to trustees, 
as a rule, will take into consideration the actual work 
necessarily done. There is no fixed basis of com- 
pensation that the courts employ. The amount fixed 



142 RAILROAD BONDS AND NOTES 

will be proportioned to the work that was necessary 
and actually rendered. 

Bondholders are entitled to appear before the 
court and contest the amount which it allows the 
trustee if they believe it to be unreasonably large. 

Expenses of the trusteeship; compensation and 
expenses paid by railroad company or out of 
the trust property; contribution by bondhold- 
ers; expenditures for large or for limited 
amounts, or for certain purposes; lien of 
trustee for compensation and expenditures. 

The trustee is reimbursed out of the trust prop- 
erty for his compensation and the necessary expenses 
of the trusteeship. 

It is not necessary that the mortgage make any 
provision for the expenses of the trusteeship. It is 
a well settled rule of law that trust property shall 
bear the expenses of its care and administration. 

The payment of the expenses of the trustee are 
usually provided for in the mortgage. The railroad 
company in its mortgage usually undertakes to pay 
the trustee for his services and reimburse him for all 
liability and expenses he may incur by reason of his 
trusteeship. Such an undertaking on the part of the 
railroad company is usually followed with the pro- 
vision that should the railroad company not pay such 
monies, then the same shall be a lien on the property 
mentioned in the mortgage, and shall be paid out 



RELATION TO THE TRUSTEESHIP 143 

of the proceeds of the mortgaged property before any 
payment therefrom to the bondholders. This latter 
provision for a lien, which the mortgage usually gives 
the trustee, is unnecessary because when the expendi- 
tures of the trustee have been proper, his claim for 
repayment and for compensation is a lien on the 
property in his charge, as a matter of law ; and he is 
paid in full out of that property for his services, and 
for his expenditures, and for any liability he may 
have incurred in the course of his trusteeship, before 
the bondholders receive anything. 

It is elementary in the law that if a large body of 
persons have an interest in a common fund or the 
same property, and one of that number takes proper 
and necessary proceedings to preserve that fund or 
property for their common good, he is reimbursed 
out of that property or fund for his services and all 
monies so expended by him; and if the fund or prop- 
erty prove insufficient then he shall be reimbursed 
by those who accept the benefits of his efforts and 
expenditures. The trustee of a railroad mortgage, 
under this principle, is entitled to be paid for his 
services and reimbursed for his expenditures out of 
the trust property; and if the trust property be in- 
sufficient, then by proportionate contribution from 
the bondholders in whose behalf or at whose request 
he acted. 

The expenditures that a trustee is permitted to 
make are those necessary to preserve or repair the 



144 RAILROAD BONDS AND NOTES 

property in his charge, including the reasonable fees 
for legal counsel to necessarily prosecute or defend 
litigation • to protect the property. 

If the expenses of a trustee are proper the ap- 
proval of a co-trustee is not necessary. 

Some railroad mortgages provide that before the 
trustee shall make expenditures beyond a certain 
amount or for a specified nature, he shall first obtain 
permission of the bondholders of a certain proportion 
in amount of the bonds then outstanding. Expendi- 
tures beyond the specified amount or of the desig- 
nated character will not be allowed the trustees, 
when made without the required permission; but if 
the bondholders in the requisite amount subsequently 
approve these expenditures it will have the same 
force as if they had been authorized in the first in- 
stance. 

The trustee will not be compelled to part with the 
property upon which he has his lien for services and 
expenditures until he has been reimbursed. This 
lien of the trustee, however, must not govern the sit- 
uation so as to control the property and interfere 
with the working out of the trusteeship. The law 
will not allow the lien of the trustee to defeat the 
purposes of the trusteeship. 

It was seen that the remedies that the trustee has 
at his command to realize on the security, upon de- 
fault by the railroad company, are either to enter 



RELATION TO THE TRUSTEESHIP 145 

into possession of the mortgaged road and to operate 
it, and, if necessary, to sell it; or to sell it without 
entering into possession ; or to foreclose the mortgage 
and ask for the appointment of a receiver to operate 
the road until it is sold at foreclosure or the company 
is reorganized and the property thus taken over. 
These remedies are discussed in detail in the follow- 
ing chapter. 



CHAPTER V 

RIGHTS AND REMEDIES WITH RELATION TO FORE- 
CLOSING THE MORTGAGE OR OTHERWISE RE- 
ALIZING ON THE SECURITY 

Three usual remedies to realize on the security. 

When the railroad company defaults under the 
mortgage, there are usually three remedies, one of 
which the trustee may pursue in behalf of the bond- 
holders to realize on the security. He may take 
possession of the mortgaged property and operate the 
road and finally sell it, if necessary, when the mort- 
gage gives him this authority; or he may sell the 
mortgaged road and property without taking posses- 
sion, when that power is given him by the mortgage ; 
or he may foreclose the mortgage and bring the en- 
tire matter into court. The right to foreclose the 
mortgage is one which the law gives and is inde- 
pendent of any provision in the mortgage; it is an 
absolute right and does not depend upon any grant 
of power to do so by the mortgage. 

If there be no provision to the contrary, the trus- 
tee may choose and pursue that remedy which he be- 
lieves will best serve the interests of the bondholders. 

146 



FORECLOSING THE MORTGAGE 147 

In many mortgages, however, it is left to the will 
of the holders of a certain proportion in amount of 
the outstanding bonds to decide which course the 
trustee shall pursue. These provisions are generally 
to the effect that the trustee shall only take posses- 
sion of the mortgaged road and operate it, or sell it, 
when requested to do so by the holders of a specified 
proportion in amount of the outstanding bonds. In 
some mortgages there is a provision that the trustee 
need not proceed to take possession of the mortgaged 
road and operate it, even though requested by the 
requisite proportion of the bondholders, until they 
furnish him with indemnity against any loss he may 
suffer or liability he may incur while so operating 
the mortgaged road under the mortgage. 

When the mortgage confers on the trustee the 
power to sell the mortgaged road, with or without 
taking possession and operating it, it does not pre- 
clude or limit the right to apply to the court for the 
foreclosure of the mortgage. The policy of the law 
is to aid the bondholders in obtaining payment of 
their bonds and interest and enforcing their security, 
and anything in a railroad mortgage that restricts 
the right to foreclose will be strictly construed; and 
whenever possible, the court will decide against any 
provision which tends to limit the right of the trus- 
tee or the bondholders to foreclose their mortgage. 



148 RAILROAD BONDS AND NOTES 

When the right to commence proceedings accrues ; 
what constitutes a default; in interest; in 
principal. 

The right to enforce the security, which the mort- 
gage or the law gives, accrues upon a default by the 
railroad company. 

A default may be a failure to pay interest or prin- 
cipal, or an instalment of principal, in the manner 
required in the bond or the mortgage ; or a failure on 
the part of the railroad company to perform any of 
the duties it has undertaken in the bond or the mort- 
gage; or the doing of an act which it should not do 
and which subjects the mortgaged property to risk 
and jeopardizes the security. 

The right to proceed to enforce the remedies is 
complete as a matter of law, immediately upon de- 
fault by the railroad company; but railroad mort- 
gages usually contain provisions with regard to de- 
faults, either postponing the time when legal pro- 
ceedings may be commenced thereon or making the 
action of the trustee to foreclosure, or otherwise pro- 
ceed against the mortgaged property, dependent upon 
the wishes of the trustee or of holders of a specified 
proportion in amount of the outstanding bonds. 

Reasons for provisions postponing action by 
trustee or holders. 

The failure to pay interest, or principal, or an in- 
stalment of principal, on the day on which it is pay- 



FORECLOSING THE MORTGAGE 149 

able is such a default, in the absence of anything in 
the mortgage to the contrary, as will entitle the trus- 
tee to commence immediately any of the proceedings 
he may have at his command, under the conditions 
previously discussed. But it is recognized that un- 
due haste in this regard may cause an unnecessary 
sacrifice of property and bring about a disorganiza- 
tion of the railroad company to the injury of the 
bondholders and the others interested in its affairs. 
Railroad mortgages, therefore, quite generally pro- 
vide that all proceedings by the trustee to realize on 
the mortgaged property shall be subject to certain 
conditions, or shall be postponed until the expira- 
tion of a certain period. 

It may well happen that a road in its first years 
may not earn enough to pay its nmning expenses, its 
necessary repairs, and the interest on its bonds. A 
temporary financial depression, an unexpected falling 
off of revenue or of income, unusual expenditures, 
or extraneous circumstances may interfere with 
prompt payments even by an established road. Rec- 
ognizing these possible conditions and in order to 
enable a railroad company, in good faith, to tide over 
a period of temporary embarrassment, railroad mort- 
gages usually contain provisions regulating defaults 
in the payment of interest. 

A provision of this character most common is that 
no action shall be taken by the trustee, or by the 
bondholders, to enforce the security for a default in 



ij:o railroad bonds and notes 

interest until the interest shall continue unpaid for 
a specified period after it is due and payable, usually 
three or six months. On short term obligations this 
period of grace is usually sixty days; and on ob- 
ligations running for a year or so no provision 
of this kind is made. Another such provision is 
that the trustee shall proceed to enforce the mort- 
gage only upon the request of the holders of a 
certain proportion in amount of the outstanding 
bonds. 

Principal may fall due upon default in interest; 
when it does not ; option of bondholders to de- 
clare principal due. 

Upon default in payment of an instalment of in- 
terest the whole principal sum of the bond may fall 
due and be payable. 

It is sometimes stated in railroad mortgages that 
when a default shall be suffered in the payment of 
an instalment of interest, and such default shall have 
continued for the specified period, usually three or 
six months, then the principal of all bonds secured 
by the mortgage and then outstanding shall become 
due and payable immediately. 

When the interest has remained unpaid for the 
specified period and is in default the mortgage may 
provide that the trustee may declare due the princi- 
pal of the bonds, if he deem it advisable; or the 



FORECLOSING THE MORTGAGE 151 

mortgage may say that he must declare it due, leav- 
ing him no discretion in the matter ; or the mortgage 
may direct that the trustee shall declare the princi- 
pal due only upon receiving from the holders of a 
certain proportion in amount of the outstanding 
bonds a demand to that effect. 

The usual provision is that the principal shall be- 
come due upon a default in interest, only when the 
holders of a specified proportion in amount of the 
then outstanding bonds shall declare it due.. That 
is, it shall be optional with the bondholders whether 
or not the principal shall become due and payable 
upon such default in interest. Should the holders 
of the specified proportion, in amount usually a 
majority, of the bonds then outstanding desire that 
the principal shall so become due, they request the 
trustee to notify the railroad company that the 
principal of the bonds is declared due. Having 
consented to this provision in the mortgage by ac- 
cepting their bonds under such mortgage, the mi- 
nority are bound by the act of the majority in this 
regard. 

If there be nothing said in the bond or the mort- 
gage as to the principal falling due upon a failure to 
pay interest, nor should it be declared due, then the 
foreclosure, or other proceeding, as a rule, is limited 
to realize for the satisfaction of the defaulted inter- 
est only. 



152 RAILROAD BONDS AND NOTES 

Default may be waived; rights of trustee and of 
majority bondholders to waive default. 

A default by the railroad company in the payment 
of interest may be waived. Bondholders at certain 
times, and under some conditions, may deem it wise 
to defer legal action and, accordingly, may waive a 
default in the payment of an instalment of interest. 

Railroad mortgages usually provide for waiving 
defaults. A fairly common provision is to the effect 
that the holders of a specified proportion, in amount, 
of the outstanding bonds secured by the mortgage, 
may waive the default by the company at any time 
before the property is sold. 

When no legal proceedings have been begun, a 
waiver merely means that matters continue as there- 
tofore; however, when legal proceedings have been 
instituted, then upon such waiver the railroad com- 
pany is restored to all former rights and to posses- 
sion of the mortgaged property, and all the rights, 
remedies, and powers of the trustee and the bond- 
holders continue, as theretofore, as if no procedings 
to enforce the mortgage had been taken. 

A waiver of one default, it is usually provided, 
shall not be understood as a waiver of any other or 
later default; nor shall it affect, in any way, the 
rights and remedies of the trustee or the bondholders 
with respect to enforcing the mortgage for any other 
or later default. 

The trustee has no power to waive a default by 



FORECLOSING THE MORTGAGE 153 

the railroad company unless the mortgage gives him 
that authority, or the bondholders by separate con- 
sent clothe him with this power; nor have a ma- 
jority of the bondholders any power to waive a de- 
fault unless the mortgage confers that right on 
them. 

Redemption by railroad company and its re- 
possession. 

Upon default by the railroad company, should the 
trustee take possession of the road under authority 
contained in the mortgage, he is entitled to hold it 
until the amount then due is either paid or ade- 
quately provided for. 

However, the usual form of railroad mortgage 
provides that while the trustee is in possession of the 
road, or foreclosure proceedings are in progress, the 
railroad company shall have the right at any time 
before the sale to have the mortgaged road restored 
to it upon payment of the amount due for principal 
and interest and of all costs, fees, expenses, and al- 
lowances. Should all not be then due, the court per- 
mits the railroad company to have repossession upon 
paying what is then due and adequately providing 
for the monies not yet due. 

Restoring the road to the company in this way 
does not affect the right of the trustee to again take 
possession of the road or foreclose the mortgage for 
any subsequent default. 



154 RAILROAD BONDS AND NOTES 

Possession and operation of the road by the trustee ; 
lease of the road; operation optional with 
trustee or with bondholders ; rights and liabil- 
ities of trustee while operating ; income during 
this period; distribution of moneys received 
by trustee ; his duties while operating road ; ex- 
penses, contracts, repairs, supplies, and help, 
incidental to operation; contracts of the rail- 
road company as affecting trustee; liability of 
trustee for negligence of employees. 

As was seen, the trustee is entitled to hold posses- 
sion of the road he has taken under the terms of the 
mortgage until the money due is either paid or ade- 
quately provided for. The railroad company will 
not be entitled to repossession until this has been 
done. So long as there appears to be any need that 
the trustee shall have possession he is entitled to re- 
tain it. Some railroad mortgages authorize the 
trustee to lease the road to others willing to operate 
it instead of doing so himself, should he deem such 
a course advisable. The period and the other de- 
tails of the lease are sometimes regulated in the mort- 
gage; though they may be left to the discretion of 
the trustee. 

Whether or not the trustee will take possession of 
the road under the terms of the mortgage and operate 
it, rests in his discretion, unless there is some pro- 
vision in the mortgage to the contrary. 

Railroad mortgages sometimes reserve to the 



FORECLOSING THE MORTGAGE 155 

bondholders the right to decide whether or not the 
trustee shall take possession of and operate the road ; 
and, accordingly, the mortgage may provide that he 
may do so only when requested by the holders of a 
certain percentage, in amount, of the bonds then out- 
standing. When the requisite number make the de- 
mand the trustee must take possession of the road 
and operate it. Under such a provision in the mort- 
gage, the trustee may not proceed of his own will ; he 
may only act when requested in the manner speci- 
fied in the mortgage. 

It is not unusual for the railroad mortgage to pro- 
vide, however, that the trustee may in his own dis- 
cretion, and must upon the request of the holders 
of a certain proportion in amount of the outstand- 
ing bonds, take possession of the road and operate 
it. 

Railroad mortgages frequently provide that the 
bondholders shall furnish the trustee with proper in- 
demnity against any loss he may suffer, and against 
any liability he may incur, in the course of his op- 
eration of the road. It will be remembered that the 
trustee is personally liable to third persons for the 
misconduct or negligence of his employees and other 
representatives in the course of the operation of the 
road by him; his liability to the bondholders is usu- 
ally limited by the terms of the mortgage to his own 
wilful wrongdoing or gross negligence. 

While in control and operation of the road the 



156 RAILROAD BONDS AND NOTES 

trustee occupies a position of trust towards the rail- 
road company and owes it duties equally as delicate 
as he does the bondholders. 

A trustee operating the road, generally speaking, 
takes the place of the railroad company. He suc- 
ceeds to all its rights and is charged with all its lia- 
bilities incident to the operation of the road under 
its franchise. He is entitled to immediate posses- 
sion for that purpose. Should the railroad company 
refuse to surrender the mortgaged property to him 
after proper demand, the court will compel it to do 
so. The court will also compel the railroad com- 
pany to account to the trustee for all income received 
by it during the time the trustee was wrongfully 
kept out of possession. 

The income that the road earns during the period 
the trustee operates it, and the proceeds of any lease 
or sale of the property, must be accounted for by him 
to the bondholders and all others interested. 

The distribution of the monies the trustee receives 
in the course of his possession and operation of the 
road or from any lease of it is regulated by the mort- 
gage that confers such power to operate or to lease. 
The usual order of distribution is : that he retain the 
expenses of the trusteeship, including his own com- 
pensation and fees for legal counsel ; that he pay the 
expenses of the management of the road during his 
possession and the cost of all repairs needed to keep 
it in good working condition; that he then pay such 



FORECLOSING THE MORTGAGE 157 

claims under liens having priority over his mortgage 
in the order of their respective priorities; and that 
then to the payment of the sums due under his mort- 
gage he apply what he then has on hand; and the 
balance, if any, he shall turn over to the railroad 
company. 

With respect to the payment of the principal of 
the bonds under his mortgage, if it be not yet ma- 
tured nor declared to be due, then the trustee first 
pays the over-due interest, with interest on the de- 
layed interest. If the principal of the bonds be 
due, or declared due, then he shall pay such principal 
with interest thereon, with interest on the delayed 
interest, ratably without any discrimination as be- 
tween principal and interest and interest on delayed 
interest. 

Should any question arise as to the proper distri- 
bution of the monies in the hands of the trustee, he 
seeks the advice and protection of the court, and 
pays out only under its direction. 

Upon taking possession of the road for the pur- 
pose of operating it under the mortgage, the trustee 
should immediately inform himself fully of the ex- 
tent of the property that has come under his charge 
and its condition; what is necessary for its operation, 
how it can be best preserved and what can be dis- 
pensed with without imperiling the security. He is 
bound to see that the property is not allowed to rust 
in disuse or depreciate in value. He must get the 



158 RAILROAD BONDS AND NOTES 

road and the mortgaged property in such condition 
as will make it most productive and most likely to 
discharge the obligations it must meet. To this end 
the trustee is entitled to incur necessary expenses. 
The law gives a preference to these indebtednesses 
necessarily incurred by the trustee to preserve the 
property and the value of the franchise. They are 
entitled to be paid before the bondholders under the 
mortgage receive anything for either interest or prin- 
cipal of their bonds. 

The trustee while in operation and possession of 
the road may make all those contracts that are inci- 
dental to the operation of a railroad. 

To operate a railroad the trustee must necessarily 
employ help, make repairs, purchase supplies and 
materials, and make the many other contracts inci- 
dental to carrying out the duties he has assumed. 
With regard to these details of management the trus- 
tee may act generally as the railroad company might 
have done had it continued in control. 

But contracts of the railroad while it was in pos- 
session and operation, and before the trustee took 
control, are not binding on the trustee unless the 
mortgage makes them so or the trustee chooses to ac- 
cept and adopt them. 

In a number of States there are statutes regulating 
the duties and obligations and rights of a trustee on 
taking possession of a railroad under a mortgage and 
operating it. These statutes become part of the 



FORECLOSING THE MORTGAGE 159 

mortgage with the same effect as if set forth therein 
at length. 

In operating the road it is the duty of the trustee 
to employ persons competent to perform the work to 
which they are assigned. He is answerable for the 
neglect of his employees when they are acting within 
the scope of their respective employments. He is 
personally liable; there is no official liability, as in 
the case of a receiver, because the trustee is not the 
officer of the court as is the receiver. He is the rep- 
resentative of the parties to the mortgage and chosen 
by them. The receiver represents the court that ap- 
pointed him. 

The usual form of mortgage, however, provides 
that should the trustee be held liable for injuries to 
persons or property caused by the negligence of him- 
self or his employees in the course of the manage- 
ment and operation of the road, he shall be reim- 
bursed out of the mortgaged property for monies he 
may have paid out for damages and for any liability 
he may have incurred. In some of the mortgages, 
provision is contained that before the trustee shall 
be required to take possession and operate the road, 
he shall be furnished by the bondholders with a 
proper and sufficient indemnity against any loss he 
may suffer or liability he may incur in the course of 
such operation. 

Some of the States have statutes relieving trustees, 
operating a railroad, from personal liability for in- 



i6o RAILROAD BONDS AND NOTES 

juries caused by the negligence of employees. They 
make him, like receivers, officially liable only; that 
is, the recovery of damages in such a case is limited 
to the property in his control. In the absence of 
such a statute he is personally liable. 

Most mortgages provide that should the trustee 
become liable for the payment of any damages, or 
incur any liability, in the course of his trusteeship, 
whether in the operation of the road or otherwise, 
he shall be reimbursed by the railroad company; 
and that should the railroad company not pay him 
nor indemnify him, then that such sums shall be paid 
to him out of the trust property, in the safeguard- 
ing and management of which he has become thus 
liable. 

Trustee selling the mortgaged property to satisfy 
claims under his mortgage; exercise of this 
power may be within the discretion of trustee 
or controlled by bondholders; details of such 
sale. 

Upon default by the railroad company, the trus- 
tee is given the power by the usual form of railroad 
mortgage to sell the mortgaged road and the other 
mortgaged property, and to satisfy out of the pro- 
ceeds what is due under his mortgage. This power 
must be specifically given by the mortgage; should 
it be silent on this point the trustee does not have 
this power to sell. 



FORECLOSING THE MORTGAGE 161 

The trustee is usually permitted to sell with or 
without entering into possession of the road and the 
other mortgaged property. 

In conferring this remedy some mortgages say that 
the trustee may exercise it as in his discretion he be- 
lieves for the best interests of his bondholders. In 
other mortgages this power in the trustee to sell is 
made dependent upon the will of the bondholders 
and the trustee may only sell when requested by the 
holders of a certain specified proportion, in amount, 
of the outstanding bonds. 

Should the trustee sell the mortgaged property 
without proper authority, he renders himself liable 
to the bondholders for any damage they may suffer 
as a result of his act. 

The sale under this power must be made at pub- 
lic auction. The property is sold to the highest bid- 
der. Notice of the sale is given by a series of ad- 
vertisements in newspapers. The amount and na- 
ture of the advertising and all the details with re- 
spect to the sale are regulated in the mortgage. 

The proceeds of the sale are applied by the trus- 
tee as provided in the mortgage, which is substan- 
tially in the same order as the rentals and other in- 
come received by him during his possession and op- 
eration. That is, he pays the costs and expenses of 
the sale and of his trusteeship, including his own 
compensation and fees for legal counsel ; then he ap- 
plies the balance to the payment of the principal and 



162 RAILROAD BONDS AND NOTES 

interest with interest on the delayed interest of the 
bonds under his mortgage. Any surplus remaining 
is turned over to the railroad company. Should 
there be prior liens against the property, the prop- 
erty may be sold subject to those liens, in which case 
the purchaser takes the property charged with their 
payment ; or the property may be sold free and clear 
of such prior liens, in which case they will be paid 
out of the proceeds of the sale. All liens entitled 
to priority over that of the mortgage, are paid in full 
before the claims under the mortgage receive any- 
thing. 

The two remedies, just treated, of either selling the 
road or operating it and then selling, if necessary, 
are quite generally contained in railroad mortgages, 
but are not often exercised by the trustee, as each 
imposes upon him many new duties and new responsi- 
bilities. Trustees, therefore, usually place the en- 
tire matter before the court by bringing an action to 
foreclose the mortgage. In this action of foreclosure 
the trustee asks the court to appoint a receiver to 
operate the road and sell it under its direction, and 
thus relieves himself of the responsibilities that are 
incident to the operation and sale of the road by him. 

Foreclosure ; outline of procedure. 

Foreclosure of a railroad mortgage means that the 
mortgaged road, and all the other property covered 



FORECLOSING THE MORTGAGE 163 

by the mortgage, and all the rights of the various par- 
ties in any way affecting it, are brought before the 
court. The court then assumes control and admin- 
isters the property. It ascertains and determines the 
rights of all the parties who in the end may be found 
to have any interest in that property before the 
court. 

The court takes physical possession of this prop- 
erty by means of a receiver. The receiver enters into 
possession of and holds the property thus given into 
his charge ; or, if the court deem it advisable, it orders 
the receiver to operate the road under its direction. 

The foreclosure action then progresses through the 
different stages of practice and procedure until the 
decree of foreclosure is reached. This decree of 
foreclosure states the amount the court has found to 
be due under the mortgage and orders that the rail- 
road company pay it within a specified time and in 
case of its failure to do so, directs that the mortgaged 
property be sold to satisfy the sum so found due. 
The decree further orders the distribution of the pro- 
ceeds of the sale. After the sale a final decree is 
signed by the court confirming what has been done. 

The property is usually bought in at the fore- 
closure sale by a combination formed by the holders 
of the bonds under the foreclosed mortgage, in which 
the holders of other issues or the stockholders may 
join. 



i64 RAILROAD BONDS AND NOTES 

Foreclosure by trustee generally; may be con- 
trolled by bondholders; rights of majority and 
minority; foreclosure by bondholders instead 
of trustee. 

The trustee, ordinarily, is the party to foreclose 
the mortgage. He is the mortgagee: the mortgage 
is made to him. 

In foreclosing the mortgage the trustee does so for 
the benefit of all the bondholders secured by that 
mortgage. He represents them all and they are not 
entitled to be made parties to the action and appear 
before the court unless their interests are endangered 
by some wrongful act of the trustee. 

The power of the trustee to foreclose is sometimes 
qualified by the mortgage. The usual qualification 
in this regard is that he shall foreclose only upon the 
request of the holders of a designated amount, usu- 
ally a majority, of the outstanding bonds, and when 
so requested he shall foreclose. He may not fore- 
close unless thus requested; and when thus requested 
he must foreclose. 

When no such qualification exists, and he is not 
taking possession of the road to operate or sell it, he 
must proceed to foreclose when requested by a mi- 
nority even against the protests of a majority. So 
long as there are some bondholders, under the condi- 
tions stated, who desire to foreclose, he must do so, 
when he is not pursuing other remedies under the 
mortgage. The majority, under these conditions, 



FORECLOSING THE MORTGAGE 165 

have their remedy. They may demand that the 
trustee take possession and operate the road, or sell 
it, should that power be conferred on him by the 
mortgage and they have the requisite holdings under 
the mortgage necessary to enforce such demand. 
They may not refuse, however, to enforce their rem- 
edies and interfere with others enforcing theirs. 

The trustee, when the railroad company defaults, 
must act ; he must pursue some remedy that the mort- 
gage or the law gives him. He may not stand inac- 
tive, even at the request of the majority. The trus- 
tee represents all the holders of the outstanding 
bonds of that issue and not a portion, even though 
that portion be a majority. He must proceed to 
protect all his bondholders and to realize on the se- 
curity for them. 

Should a majority desire that the trustee do noth- 
ing; that he neither take possession of the road, un- 
der the mortgage, and operate it or sell it, nor that he 
foreclose the mortgage, they may stop proceedings 
only by satisfying the claims of the minority by pay- 
ing the value of their bonds with interest and the 
costs of the suit already incurred. 

There are circumstances when the bondholders in- 
stead of the trustee may foreclose the mortgage. 
Generally, this is when the trustee has refused or 
neglected to do so after having been properly re- 
quested; or when he is not acting in good faith; or 
when he is not properly protecting the interests of 



i66 RAILROAD BONDS AND NOTES 

the bondholders; or when he has acquired interests 
that are antagonistic to those of the bondholders; 
or when he occupies a hostile position toward them. 
And should the trustee have commenced the fore- 
closure, the court will permit the bondholders to 
come in and prosecute the suit, and displace him, 
when sufficient reasons along the lines indicated ap- 
pear to its satisfaction. 

Should there be a vacancy in the trusteeship the 
bondholders foreclose. 

Bondholders, by a provision in the mortgage, often 
agree that they shall not foreclose the mortgage but 
that the right to do so shall vest absolutely in the 
trustee. Notwithstanding this provision, the bond- 
holders may foreclose the mortgage themselves, when 
the trustee has lost his right to do so by his bad 
faith, opposing interests, antagonistic attitude, or in 
any other way not properly protecting their rights. 

When bondholders foreclose the mortgage, instead 
of the trustee, they act for themselves and all the 
other bondholders secured by that mortgage. All 
bondholders secured by the same mortgage have a 
common interest in the security. What benefits one 
inures to the benefit of all as a class. The court pro- 
tects the rights of all bondholders though not ap- 
pearing personally in the action which has been 
brought by one or more of their number in behalf of 
all. The other bondholders, however, may come in 
and be made parties to the action should they so de- 



FORECLOSING THE MORTGAGE 167 

sire. See Litigation is conducted by the trustee^ etc. 
Page 126. Also see Bondholders may conduct liti- 
gation instead of trustee. Page 128. 

When foreclosure sale had. 

It may be said that, as a general rule, a foreclosure 
sale will not be ordered until toward the end of the 
action, when all the rights and priorities of the par- 
ties in the property have been decided by the court. 
But when the property is in such condition that it 
may seriously depreciate in value during the progress 
of the foreclosure, and there is no available money to 
put it in repair and properly maintain it, the court 
may order it sold immediately or as soon as circum- 
stances justify. However, to sell the property be- 
fore the rights of the parties and all contests and 
disputes have been settled is unusual and will not be 
done unless special circumstances make it necessary. 

Entire road sold as one instead of in separate par- 
cels; foreclosure for interest; lease instead of 
sale ; when divisions are separately mortgaged ; 
mortgages on constituent roads of consolidated 
company. 

The road and the other property included in the 
mortgage is sold, as a general rule, in its entirety as 
one lot. This is because railroad property can rarely 
be divided into parcels and sold separately without 
injury to the road as a working unit. Each part 



i68 RAILROAD BONDS AND NOTES 

depends for its value in a great measure upon 
the existence and cooperation of the others and 
all depend for their fullest value upon their con- 
certed and active use. If the unity of the road 
be maintained so that a purchaser at the foreclosure 
sale is in a position to continue it as a going concern, 
it will influence the price advantageously; indeed, 
it is doubtful if any bid worth considering would be 
made if the road were not in the condition that it 
could be operated immediately upon purchase. 

If the property be capable of division without in- 
jury, it may be sold in separate parcels. 

Where the mortgage is foreclosed for failure to 
pay an instalment of interest, then only so much of 
the mortgaged property as will satisfy the claim for 
interest will be sold if the property may be divided 
without injury. But if the property cannot be di- 
vided without injury it will be sold together. 

There are times when a sale of the mortgaged 
property would work an unnecessary injury to the 
railroad company and its other creditors without 
gaining anything thereby to the bondholders. The 
claims of the bondholders may be satisfied, perhaps, 
without the disorganization of the railroad company 
and the needless sacrifice of property that the fore- 
closure may result in. This is attempted by means 
of a lease. The road is leased to one or more per- 
sons, or a corporation, who take it over and work it, 
paying therefor a stipulated rental. This rental is 



FORECLOSING THE MORTGAGE 169 

paid to the trustee and is applied to the satisfaction 
of the claims under the mortgage. The court orders 
the lease for the shortest period that will produce 
enough money to meet the claims against it. In the 
lease precaution is taken against the lessee neglecting 
the property. The lessee is usually required to give 
security that he will keep the road in good repair and 
condition during the term of the lease. 

Leasing is resorted to when the value of the prop- 
erty is greatly in excess of the amount for which the 
foreclosure is brought, as when the action is for de- 
faulted interest only. 

Bondholders may be secured by a mortgage on one 
part or division of a road. They then, of course, 
have no interest in mortgages covering other parts or 
divisions. They are limited to the division that 
their mortgage covers. But cases do arise where sev- 
eral divisions have been separately mortgaged and 
all the mortgages foreclosed at the same time ; or two 
or more roads may have consolidated, having mort- 
gages on each constituent road and then these mort- 
gages may be foreclosed at the same time. In such 
cases the court may order a sale of the entire road 
and then adjust the claims of the bondholders under 
these several mortgages upon the proceeds. 

The claims of the several classes of bondholders 
under their separate mortgages are adjusted accord- 
ing to the value of the part or division of the road 
upon which they had their respective mortgages. But 



170 RAILROAD BONDS AND NOTES 

this is not the general rule and the entire property 
is sold only when a sale of each division under each 
mortgage would be harmful to the entire property. 
Bondholders under each foreclosed mortgage are en- 
titled to sell the property or division covered by their 
respective mortgages without being involved in any 
other foreclosure unless an unusual situation is pre- 
sented. The courts realize that the sale of a system 
as an entirety, under these circumstances, would in- 
terfere with the opportunity of the bondholders un- 
der each mortgage to combine to protect their se- 
curity without, perhaps, burdening themselves with 
handling the entire road. Therefore, when there are 
separate mortgages against separate divisions, each 
division will be sold separately to satisfy the claims 
against it unless this cannot be done without injury; 
then the court will order that all be sold together 
and adjust the claims of the several mortgages upon 
the proceeds. 

Reasons for combinations to purchase; combina- 
tions of bondholders and others ; rights of non- 
participating bondholders. 

Every effort should be made to get the best price 
for the mortgaged road that is to be sold. And the 
court will aid any endeavor in that direction. 

The amount involved is usually too large for in- 
dividual enterprise. And it is the custom, and al- 
most necessarily so, for the bondholders under the 



FORECLOSING THE MORTGAGE 17! 

foreclosed mortgage, with or without others, to com- 
bine to purchase and to reorganize railroad property 
when sold under foreclosure. Without such com- 
binations, the number of bidders would be very lim- 
ited and take away to a great extent the competitive 
bidding necessary to prevent a sacrifice of property. 
For the bondholders to combine in this way is only 
what prudent men should do to protect their security. 
The course by which the bondholders unite is to en- 
ter into an agreement among themselves, pursuant 
to which their bonds are deposited with a committee 
for the purpose of purchasing the road. The com- 
mittee accordingly purchases the road, organizes a 
new corporation to take over and operate the road so 
purchased. 

When these combinations are properly entered 
into and without any intention to defraud any party 
in interest, they are favored by the courts. The 
legislatures of many of the States have enacted laws 
regulating the taking possession of railroad property 
by persons who have combined and purchased it at 
a foreclosure sale. Generally, these statutes author- 
ize the purchasers of a railroad at a foreclosure sale 
to reorganize as a new corporation and to operate the 
property so purchased with the franchise of the old 
company. These statutes, in some of the States, 
create the purchasers of railroad property at a fore- 
closure sale into a corporation without any formal 
act on their part. The mere fact that they have 



172 RAILROAD BONDS AND NOTES 

purchased the railroad property at foreclosure sale 
constitutes them a corporation under these statutes. 
Bondholders who have not joined in the purchas- 
ing combination are entitled to their proportionate 
shares of the proceeds of the sale; and they may 
compel the newly organized corporation to account 
to them for any property it may have received from 
the old railroad company, when there is any question 
as to whether they have received all they are enti- 
tled to or not. See Chap. VIII. Rights and Rem- 
edies with Relation to the Reorganization of the 
Railroad Company. Page 335. 

Persons barred from purchasing at the foreclosure 
sale ; persons who may purchase. 

The trustee is not permited to purchase the mort- 
gaged property in his own behalf, without being 
liable to account to his bondholders therefor. It is 
rudimentary in the law that one occupying a position 
of trust and confidence toward property may not 
purchase that property in his own behalf. The trus- 
tee, however, is very often authorized by the mort- 
gage to purchase at the foreclosure sale on behalf of 
the bondholders at their request: he may then do so. 

As a rule any one may purchase at the foreclosure 
sale whose relations to the property is not one of 
trust and confidence. The president of the road 
may purchase as an individual when there is no 
fraud or unfairness. The attorney for the road may 



FORECLOSING THE MORTGAGE 173 

purchase and take title to the property at foreclosure 
for the benefit of the bondholders, at their request. 
A director of the railroad company, however, occu- 
pies a position of trust toward it and he may not, 
therefore, purchase as an individual without permis- 
sion of the court or the railroad company. 

Bondholders may purchase for themselves. Or- 
dinarily, they are the most likely purchasers, because 
they need not pay their bid in cash. 

Rights of purchasers; title acquired; franchise to 
operate ; distinction pointed out. 

The purchaser at the foreclosure sale, generally 
speaking, takes whatever rights the trustee and the 
railroad company had in the property covered by the 
mortgage. The decree of sale specifies the property 
and the interest in it that is to be sold; it must not 
include anything not covered by the mortgage. 

The franchise to operate the road does not pass 
to the purchaser unless it was included in the mort- 
gage and the decree of sale. However, it is included 
in railroad mortgages, quite generally, to enable the 
purchaser to continue the road in operation. The 
franchise cannot be used without a road; and a road 
cannot be used lawfully, as against the state, without 
a franchise. Each loses value without the other; 
therefore the franchise to operate is usually included 
in railroad mortgages, so as to give a value to the 
physical property of the road. Those statutes, as 



174 RAILROAD BONDS AND NOTES 

previously mentioned, which constitute the pur- 
chaser of railroad property at a foreclosure sale 
into a corporation do not confer on them the fran- 
chise to operate the road; that must be included in 
the mortgage and purchased at the foreclosure sale. 

When the franchise to operate is included in the 
sale, the purchaser acquires all the rights the railroad 
company had to operate the road. 

It is not necessary that a corporation should pur- 
chase the road or that persons who have purchased 
should incorporate in order to operate it. The fran- 
chise to operate the road may be exercised by indi- 
viduals. The custom, however, is that a corpora- 
tion shall operate the road. 

That individuals, as such, and without incorporat- 
ing, may operate a railroad, demonstrates sharply 
the difference between the franchise of the company 
to exist as a corporation and its franchise to operate 
the road. The franchise to operate the road is a 
special privilege granted by the State. It is usually 
granted to a corporation already in existence and 
already exercising its franchise to exist as a corpora- 
tion. 

The franchise to operate the road between certain 
terminii and over certain territory to the exclusion of 
all others is owned by the corporation just as it owns 
any other piece of property. 

The franchise to exist as a corporation is also a 
privilege granted by the State, but it is a distinct and 



FORECLOSING THE MORTGAGE 175 

separate privilege from the franchise to operate a 
railroad. As was seen, the corporation may be in 
existence under its franchise to be a corporation be- 
fore it receives its franchise to operate a railroad; 
and the railroad company may continue in existence 
as a corporation after it has lost the franchise to 
operate the road by reason of its sale at foreclosure. 
In fact a railroad corporation after it has been 
stripped of all its property, including its franchise to 
operate the road, continues in existence until dis- 
solved by legal proceedings to which the attorney 
general, representing the State, is a party. 

The purchaser of the franchise to operate the road 
does not by reason of that purchase acquire the right 
or franchise to be a corporation, unless some statute 
expressly makes such purchasers a corporation by 
reason of such purchase. 

The legislatures of many of the States have en- 
acted laws providing for purchasers of railroad prop- 
erty at foreclosure sales to become incorporated for 
the purpose of taking over the property and operat- 
ing it. In some of the States these statutes en- 
able such purchasers to become a corporation im- 
mediately upon taking over the property. Some 
of these statutes declare that the new corporation 
so created shall have all the privileges and be 
charged with all the obligations of the old company 
relating to the operation and the maintenance of 
the railroad. 



176 RAILROAD BONDS AND NOTES 

Standing of purchaser at foreclosure sale. 

The purchaser at the foreclosure sale makes him- 
self a party to the legal proceedings which relate to 
the sale to the extent that the court may compel him 
in those proceedings to carry out his purchase. At 
the same time he becomes entitled to be heard before 
the court in the foreclosure proceedings on all mat- 
ters which in any way affect his bid or his liability 
as a purchaser. 

Liability, if any, of purchaser or new corporation 
for debts and contracts of the railroad com- 
pany; for mortgages and other liens against 
the property; sale subject to or free of such 
mortgages or other liens; transferring liens 
to proceeds of sale. 

The purchaser at the foreclosure sale does not be- 
come liable, by his acquisition of such property, for 
the debts or contracts of the railroad company. Nor 
does the new corporation which is formed and takes 
over the road become liable for the debts or con- 
tracts of the old company because it succeeds it. 

However, if the debts or contracts or mortgages of 
the old insolvent railroad company are liens on the 
mortgaged property sold, having priority over the 
lien of the foreclosed mortgage, the purchaser may 
take the property subject to such liens. Then the 
purchaser must satisfy such liens but only to the 



FORECLOSING THE MORTGAGE 177 

extent that the property against which they are a lien 
will do so. Beyond that there is no liability. 

The property may be sold free and clear of all 
such prior mortgages and other liens. Their liens 
are then transferred to the proceeds of the sale. 
Under these circumstances the purchaser takes the 
property without any burdens as to such liens. This 
enables him to get the road and operate it unem- 
barrassed by any incumbrances, but requires more 
money as the purchaser must then pay the entire 
price. 

Should the purchaser take the property subject to 
prior liens, immediate money for their satisfaction 
may not be needed, as they may not be due for some 
time, or if due, provision may be made for their pay- 
ment at some time in the future. 

Purchasers as affected by debts, contracts, and cer- 
tificates of receiver. 

The mortgaged property is also sold, quite gen- 
erally, free from the lien of the receiver's certificates 
and the lien thereof is transferred to the proceeds of 
the sale. The property, however, may be sold sub- 
ject to the lien of the receiver's certificates, whereupon 
the purchaser must pay them to the extent that the 
property against which they were charged will do so. 
That is, his liability is limited to the property pur- 
chased; there is no personal responsibility or liabil- 



178 RAILROAD BONDS AND NOTES 

ity after such property has been exhausted for that 
purpose. This matter is always taken care of by 
the decree of the court which fixes the terms of the 
sale and the conditions under which the property 
shall be sold. 

The purchaser at the foreclosure sale takes the 
property free from the debts of the receiver, except 
such as may be specifically charged against such prop- 
erty, as receiver's certificates usually are. 

The contracts that the receiver made during his 
receivership are not binding on the purchaser at the 
foreclosure sale unless he chooses to accept and adopt 
them. He is at liberty to reject any or all contracts 
made by the receiver and to refuse to be affected by 
them, or some of them; or he may accept them, or 
some of them, and make them his own with the same 
force as if he had made them himself. 

Effect of foreclosure on claims of general or unse- 
cured creditors; on subsequent mortgages or 
other liens; on claims of the foreclosing bond- 
holders; on prior mortgages or other liens; 
certain liens having priority ; equity of redemp- 
tion. 

The foreclosure sale cuts off the claims of general 
or unsecured creditors so far as the property involved 
in the foreclosure is concerned. Their claims, how- 
ever, continue against the railroad company. 

The foreclosure sale also cuts off all claims 



FORECLOSING THE MORTGAGE 179 

against the property involved in the foreclosure un- 
der mortgages or other liens that attached to that 
property later than the lien of the foreclosed mort- 
gage. These claims, of course, continue against the 
railroad company, but their lien or special claim 
against that property is cut off. 

The mortgaged property is sold, as a rule, free 
from the claims of the bondholders of the foreclosed 
mortgage against it. Their lien with relation to that 
property is transferred to the proceeds of its sale. 

Rights under prior mortgages or other prior liens 
are not affected by the foreclosure action. Such 
rights continue superior to those under the foreclosed 
mortgage. They must be satisfied in full, so far as 
the property can do so before the bondholders under 
the foreclosed mortgage receive anything. 

A prior mortgage or other prior lien is one that 
attached to the property prior in point of time to the 
foreclosed mortgage, or which has been given priority 
over the latter by consent of its bondholders, or which 
on account of its nature is made superior and there- 
fore prior to it. The lien for public taxes, for in- 
stance, though accruing later than the foreclosed 
mortgage was executed or took effect, is always su- 
perior to such mortgage and is given priority over it. 
The lien of receiver's certificates and of claims for 
operating expenses prior to the receivership may also, 
by reason of their nature, be given a priority, by 
direction of the court, over the foreclosed mortgage, 



l8o RAILROAD BONDS AND NOTES 

though the debts they represent may have been 
incurred subsequent to the time when the lien of the 
foreclosed mortgage attached. 

By selling the property free from the claims under 
mortgages and other liens which attached to the prop- 
erty subsequent to the foreclosed mortgage, and also 
by selling such property subject to those mortgages 
and other liens that attached thereto prior to the fore- 
closed mortgage, the bondholders under the fore- 
closed mortgage are enabled to sell and realize upon 
the property in the condition it was in when mort- 
gaged to them. But bondholders must always have 
in mind that the lien of their mortgage may be super- 
seded by the lien for public taxes, assessments, and 
other governmental charges ; and that it may be dis- 
placed by order of the court by claims for receiver's 
certificates and, sometimes, by claims for operating 
expenses. 

It is quite generally the rule that where real estate 
has been mortgaged and the debtor defaults, and the 
mortgage is foreclosed, he may redeem the property 
at any time before, and in some States within a speci- 
fied period after, the sale by paying all that is due at 
the time of such redemption. But a sale under a 
foreclosure of a railroad mortgage cuts off this right 
of redemption by the railroad company, and the pur- 
chaser at the foreclosure sale takes the property free 
from this equity of redemption, as it is called, unless 
a statute or the decree of the court reserves this right 



FORECLOSING THE MORTGAGE 181 

to the railroad company. See Waiving redemption 
laws^ etc. Page 88. 

Time and place of sale; notice of sale; adjourn- 
ment. 

The time when and the place where the sale shall 
be had are fixed by the court in its decree of sale. 
These matters rest largely in the discretion of the 
court. 

In appointing a time for the sale of railroad prop- 
erty, the court takes into consideration the condition 
of the finances of the country and may postpone a 
sale until better results are more likely. 

The property is sold at public auction unless the 
court shall otherwise direct. The court may order 
the property sold at private sale ; but before doing so 
it requires that it be fully informed as to the value 
of the property and the price it would probably bring 
at a public sale. If it appear to be to the best inter- 
ests of those concerned, the court may order that the 
property be sold at private sale. 

The sale is conducted by an officer whom the court 
appoints for that purpose. 

All the parties interested are entitled to notice of 
the time and place of sale. They should receive due 
notice in advance so that they shall have a timely 
opportunity to protect their security against a defi- 
ciency. The decree of the court states what notice 
shall be given; but if there is some statute in the 



i82 RAILROAD BONDS AND NOTES 

State where the property is sold, which regulates 
these notices, its requirements must be strictly fol- 
lowed. The usual method of giving notice is by a 
series of advertisements in newspapers, designated in 
the decree. 

The court, or the officer whom the court has ap- 
pointed to conduct the sale, may adjourn or postpone 
the sale on the application of the interested parties 
when it is shown that it is for the best interests of all 
that it be done. 

Preventing, stopping, or setting aside the sale; 
reasons therefor; losing rights by delay, by 
participation; effect of setting aside sale. 

Bondholders have the right to have the sale pre- 
vented, stopped, or set aside, when sufficient grounds 
exist. The most common ground is that of fraud in 
some form. 

That the price for which the property was sold is 
inadequate is not sufficient reason in itself for setting 
a sale aside. Nor will a sale be vacated because it is 
likely that the property would bring more on a re- 
sale. 

To induce the court to interfere on the ground of 
insufficiency of price, it must be shown that the inad- 
equacy is so great as to excite the suspicion of the 
court. If the inadequacy of price be so gross as to 
lead to the inference that it was not an honest sale, 



FORECLOSING THE MORTGAGE 183 

the court will set it aside. And, too, the court will 
interfere when the inadequacy of price is accom- 
panied by circumstances that suggest fraud. 

A combination among bidders is ground to set 
aside the sale only when fraud is shown. The most 
common instance of fraud in this relation is the 
attempt to stifle competition in bidding. A combi- 
nation between bondholders and stockholders for the 
purpose of, and which will have the effect of, depriv- 
ing the unsecured creditors of their rights has been 
condemned by the courts and the sale under such cir- 
cumstances set aside. 

Those entitled to have the sale set aside must 
move promptly because by an unreasonable delay 
they may lose their rights to do so. To excuse delay 
in this regard it must be shown that the facts urged 
as the reason for setting the sale aside did not come 
previously to the knowledge of the one seeking this 
relief; and that he applied to the court for relief 
against the objectionable sale within a reasonable 
time after he acquired such knowledge. But his lack 
of knowledge of the facts must not be the result of 
any neglect on his part. He must show that by 
reasonable diligence he could not have discovered the 
fraud sooner. But if the means of knowledge be 
open to him, he is charged with such knowledge that 
with reasonable diligence he could have discovered. 
What is an unreasonable delay in one case may not 



i84 RAILROAD BONDS AND NOTES 

be in another. What constitutes an unreasonable 
delay depends upon the circumstances and facts of 
each particular case. 

A bondholder may also lose his rights to object to 
a sale by participating in the transaction. The law 
then assumes that by his conduct he has consented to 
the transaction and thereby loses his right to object. 

Should the court set aside the sale, it attempts to 
put the parties in the same position, so far as prac- 
ticable, as they were before the improper sale took 
place. And should setting aside the sale interfere 
with the rights of innocent third parties, who have 
in the meantime dealt with the parties or the prop- 
erty and without knowledge of any wrong have 
acquired rights in the property, then the court will 
protect such interests as the situation justifies. 

Terms of sale ; payment of bid by bondholders. 

The terms of the sale are fixed by the decree of 
the court ordering the property sold. It may and it 
usually does fix a price below which the property may 
not be sold. This is called the "upset price." In 
some States there are laws to the effect that before 
the property of a railroad shall be sold at foreclosure 
it shall be appraised to determine its value by pub- 
lic appraisers appointed by the court or designated 
by such statute. 

The court may require that each bidder shall jnake 
a deposit of a specified sum of money to insure good 



FORECLOSING THE MORTGAGE 185 

faith in bidding. This is a precaution against 
"straw" bidding. Should the sale not be confirmed 
by the court, the deposit is returned. 

The decree may permit the sale to be made on 
credit. On account of the large sums involved, rail- 
road property, ordinarily, is not salable if all cash be 
insisted upon. The court may compel the purchaser 
to pay in cash a specified portion of his bid and allow 
him time to pay the balance. When the property 
is sold on credit, the court continues the lien of the 
bondholders under their mortgage against the prop- 
erty in the hands of the purchaser for any unpaid 
balance of the bid. 

When the bondholders under the foreclosed mort- 
gage are the purchasers, they are usually permitted 
to pay their bid with their bonds and coupons after 
paying in cash the costs of the litigation and such 
other charges as the court may direct. The bonds 
and the coupons are then accepted as the equivalent 
of the sum to which they would be entitled to receive 
upon a final distribution as their proportionate shares 
of the proceeds of the sale. 

The property of a railroad company, running 
through two or more States and situated at numerous 
places, is always, and most naturally so, subject to 
claims of many kinds and of different legal ranks 
and priorities; and there follows the inevitable con- 
flict between these different classes of creditors as to 



i86 RAILROAD BONDS AND NOTES 

their respective rights and priorities with respect to 
certain or all of the property of the insolvent road. 

Should the trustee, with a railroad in such a con- 
dition, attempt to take possession and to operate the 
road, he may find himself the center of a complex 
situation, and subject himself to many new responsi- 
bilities, liabilities, and embarrassments. As a rule, 
therefore, he deems it the wiser and safer course to 
foreclose the mortgage and thus put the entire 
matter into court and ask it to assume control and 
administer the property and affairs of the railroad 
company through its receiver. He does this by 
bringing an action to foreclose the mortgage. 

While the action of foreclosure progresses, the 
receiver continues the road in operation. Incidental 
to his management and operation of the road, the 
receiver employs help, makes necessary repairs, buys 
needed material, and does such other acts as are 
necessary to carry out his receivership. The appoint- 
ment of the receiver and his qualifications, his duties, 
powers, and liabilities, and his relation to the prop- 
erty in his care, and to the bondholders and the other 
interested parties, are discussed in detail in the fol- 
lowing chapter. 



CHAPTER VI 

RIGHTS AND REMEDIES WITH RELATION TO THE 
RECEIVERSHIP OF THE RAILROAD COMPANY 

Receivership generally ; outline of management and 
operation of road by receiver. 

The foreclosure of the mortgage places the mort- 
gaged property under the control of the court. It 
is the duty of the court to preserve and to protect this 
property and the interests of all concerned in it. 

The court preserves the property and protects the 
interests of the parties in it by taking the mortgaged 
road out of the hands of the officers of the railroad 
company and placing it in charge of its receiver. 
The court then administers the property through its 
receiver. As the value of railroad property consists 
chiefly in its worth as a working unit and an income- 
producing and going concern, the court usually con- 
tinues the road in operation. The receiver operates 
under the supervision of the court and under the 
charter of the railroad company. The receiver takes 
the income of the road during such period and applies 
it to the expenses of the receivership, making such 
other payments as the court may direct. He also 
gathers the assets of the railroad company. In the 
course of his management, the receiver employs help, 

187 



i88 RAILROAD BONDS AND NOTES 

buys needed material and supplies, makes all expend- 
itures necessary to keep the road in operation or to 
save the property from loss or depreciation. He 
renders a final accounting at the conclusion of the 
receivership, and also such intermediate accountings, 
from time to time, as the court may direct, showing 
his receipts and disbursements ; and he distributes the 
moneys in his hands as the court orders him. He 
continues in control until the court directs him to 
turn over the property. This usually happens when 
the property is sold at the foreclosure sale or is turned 
over pursuant to some plan for the reorganization of 
the road. It takes time to carry out a reorganization 
of a railroad or to adjust its affairs; the receiver 
therefore may continue in control and operation of a 
railroad for a considerable period, sometimes for sev- 
eral years, while a reorganization is being worked 
out or an adjustment perfected. 

Grounds for receivership ; when appointed ; default 
in interest or principal ; insolvency ; inadequate 
security; when income mortgaged; threatened 
waste of property ; application by railroad com- 
pany. 

The appointment of a receiver is never a matter 
of absolute right. It is for the court to decide 
whether or not one is necessary. And before the 
appointment is made it must be shown to the satis- 
faction of the court that a receivership is necessary 



RECEIVERSHIP OF RAILROAD COMPANY 189 

to prevent loss or injury to those financially inter- 
ested. 

Application for the receivership is made usually 
by the trustee of the mortgage, and on the ground 
that the railroad company has defaulted in the pay- 
ment of the interest or the principal of the bonds, or 
has defaulted under the mortgage in some other par- 
ticular, that it is insolvent, and that the security is 
inadequate. Generally, the fact alone that the com- 
pany has defaulted in principal or interest of the 
bonds is not sufficient grounds for the appointment 
of a receiver, though it gives the right to foreclose 
the mortgage or otherwise realize on the security. 
Nor is the insolvency of the railroad company alone 
sufficient ground for a receivership, unless made so 
by the statutory law of the state, or unless such in- 
solvency is caused by fraud or such mismanagement 
by the officials of the company that it is necessary to 
interfere to save the assets and protect the rights of 
those financially concerned. A judgment creditor is 
sometimes entitled to the appointment of a receiver. 

However, such default or insolvency in connection 
with other circumstances, such as, that the mortgaged 
property is an inadequate security, or that the officers 
of the railroad company are wasting this property, 
misapplying the income of the road or otherwise con- 
ducting themselves in a manner prejudicial to the in- 
terests of the bondholders, will generally influence 
the court to appoint a receiver. 



190 RAILROAD BONDS AND NOTES 

When it is the duty of the trustee under the mort- 
gage to take possession of the road, upon a default of 
the company, and he fails to do so or improperly 
does so, the court will appoint a receiver for that pur- 
pose. 

Upon the foreclosure of a mortgage covering the 
income and profits of the railroad company, the court 
usually appoints a receiver to take these moneys to 
prevent their misapplication. 

As a rule, the receiver is appointed as one of the 
steps in the foreclosure action; but there are cases 
when the court may appoint a receiver before the 
railroad company has actually defaulted under its 
mortgage and the trustee or the bondholders have 
the right to sue on such default. Such a case is when 
the railroad is insolvent and unable to meet its obli- 
gations soon to fall due and there is danger that the 
property covered by the mortgage may be wasted or 
impaired by its management. Under such circum- 
stances, when the default is imminent, the court, in 
order to prevent this probable loss, will take the man- 
agement of the road from those who caused this con- 
dition and will place it in the hands of a receiver who 
will better serve the public and the persons financially 
interested. 

The railroad company itself may, in extreme cases, 
apply for a receivership, as, when it is insolvent and 
its property is likely to be wasted or lost if it con- 
tinues in operation. Dissension, however, in the 



RECEIVERSHIP OF RAILROAD COMPANY 191 

management of a railroad company, as a rule, does 
not justify the appointment of a receiver. 

Attitude of the courts towards receiverships of rail- 
roads; serving the interests of the public and 
the bondholders. 

It is with extreme caution, if not with reluctance, 
that courts undertake to appoint a receiver of a rail- 
road, as the effect of the appointment is to suspend 
the operation of the road by the corporation to which 
the franchise to do so was given and place it in the 
hands of a receiver, and in most cases devolving upon 
the court, to a greater or less degree, the management 
of the business of the railroad company. Therefore, 
the need of a receivership must be shown clearly be- 
fore the court will make the appointment. It must 
be shown that loss or injury to the property involved 
will result if a receiver be not appointed. 

The court will not take lightly the management 
of a railroad from the officers of the company and 
place it in the hands of a receiver. And when it 
does so it is to preserve the property until the financial 
embarrassment of the company has passed, or the 
property is disposed of for the best interests of those 
concerned, under the circumstances. It seeks to save 
the security to the bondholders by taking it in its 
care. Public policy demands that a railroad needed 
as a means for transportation of persons and property 
shall not be permitted to rust in disuse and its fran- 



192 RAILROAD BONDS AND NOTES 

chise forfeited ; the court, therefore, seeks to serve the 
public by continuing the road in operation. And, 
from the standpoint of the bondholders, better results 
are obtained if the road is continued in operation and 
sold as a going and an income-producing business, 
notwithstanding that expenses may be incurred which 
are paid out of the mortgaged property in full before 
the bondholders receive anything. 

Appointment is discretionary with the court; con- 
sent of parties interested ; bond of receiver. 

Whether or not a receiver shall be appointed is a 
matter resting in the sound discretion of the court. 
This discretion, however, is exercised according to 
precedents which depend, in their application, upon 
the facts and circumstances that each case presents. 
Nevertheless, in every case, before the court will 
appoint a receiver, there must be presented to it facts 
from which the necessity for the receivership must 
appear. Those facts and conditions which the prece- 
dents have regarded as sufficient reasons for a receiv- 
ership have been previously discussed. See Grounds 
for receiverships etc. Page 188. 

The fact that the interested parties consent to a 
receivership is not decisive or binding on the court. 
The court is not bound by their consent. It may 
ignore their consent and refuse to make an appoint- 
ment. 

As a general rule, the court will require the re- 



RECEIVERSHIP OF RAILROAD COMPANY 193 

ceiver before he will be permitted to take possession 
of the property, to execute and file a bond, with sure- 
ties, in an amount fixed by the court, for the faith- 
ful performance of his duties as receiver, that he will 
carry out all orders of the court and that he will 
render his accounting. The sureties on the bond 
bind themselves to the effect that the receiver will 
perform his duties faithfully, that he will carry out 
all orders of the court, that he will render account- 
ings of the property he has received and of his re- 
ceipts and disbursements and of all his official acts, 
whenever required to do so, and that should he fail 
in any of these particulars, then to those who suffer 
a loss as a result of his wrongful acts or failure to 
act, they will pay such damages as may be sustained. 
The liability of the sureties in the aggregate shall not 
exceed the amount mentioned in the bond. The 
bond and the financial standing of the sureties are 
passed upon by the court should there be any ques- 
tion raised about them. 

Effect of receivership on existing rights ; on mort- 
gages or other liens ; attaching creditors ; judg- 
ment creditors; suits against the receiver. 

The appointment of a receiver does not change the 
rights of any of the parties in their relation to the 
mortgaged property. It merely stops, for the time 
being, the enforcement of these rights and remedies 
by other legal actions or proceedings. All persons 



194 RAILROAD BONDS AND NOTES 

having claims against the mortgaged property or 
against the insolvent road must prove their claims in 
the action or proceeding then before the court in 
which the receiver has been appointed, and their 
interests are determined there with the same effect 
as if each had brought a separate action for that 
purpose. 

The property comes into the possession of the re- 
ceiver subject to all the mortgages and other liens 
that exist against it at that time. The receivership 
does not affect, in any way, the legal standing of 
such mortgages, other liens, or claims, nor their re- 
spective rights to priorities in payment, except that 
the court may direct that "operating expenses" be 
paid out of the moneys in the hands of the receiver 
in preference to other claims; or, it may order the 
receiver to issue receiver's certificates to raise money 
to preserve the property, and may order that they be 
a first lien on that property and paid before all 
mortgages, certain other liens and claims. See 
Operating expenses prior to receiverships etc. Page 
245. ^t^. Receiver's certificates. Page 2 10. 

The receivership adds nothing to the rights of the 
parties who procured the appointment. It does not 
dissolve the railroad corporation. It merely means 
that the court has taken charge through its officer. 
And when the court has the property thus in its pos- 
session, those creditors who have secured attachments 
against the company may not enforce them against 



RECEIVERSHIP OF RAILROAD COMPANY 195 

the property in the hands of the receiver; nor may 
those creditors who have sued the railroad company 
and obtained judgment then enforce their judgments 
against this property. To do so is a contempt of 
court and is punishable by fine or imprisonment, or 
both. The property being in the possession of the 
receiver, no creditor shall take it or interfere with it 
without the court's permission. Their claims must 
be adjudicated in the suit before the court in which 
the receiver has been appointed, because in that suit 
the court determines the rights of all parties inter- 
ested, in any way, in that property. 

After a receiver has been appointed, no suit may be 
brought against him in his official capacity without 
permission of the court. To do so is a contempt of 
the court, for the receiver is the officer of the court 
and shall not be interfered with in his possession of 
the property or the performance of any of his duties 
without permission of the court. 

Ancillary receiverships ; road running through two 
or more states; appointment of same receiver 
in each jurisdiction; jurisdiction of courts of 
each state; may appoint their own receiver. 

Courts have no power to appoint a receiver to act 
outside of the State or the territory over which they 
have jurisdiction. The jurisdiction of the courts of 
each State is limited to the territory embraced within 
that State. The jurisdiction of a Federal court cov- 



196 RAILROAD BONDS AND NOTES 

ers only the territory within its own district, which in 
some districts extends over several States. The re- 
ceiver has no power to act in places over which the 
court that appointed him has no jurisdiction. 

Where a road runs through several States and 
beyond the jurisdiction of the court that first ap- 
pointed the receiver, the management of the entire 
road is usually placed in the charge of the receiver 
first appointed, by the courts of the other States 
appointing him as their receiver to act within their 
respective jurisdictions. These second appoint- 
ments, by these other courts, are called ancillary 
receiverships. Should each court appoint a different 
receiver, confusion is inevitable. Such ancillary 
receiverships are made, therefore, to bring about har- 
mony of management and the satisfaction that results 
therefrom. 

However, the court making the ancillary appoint- 
ment does not surrender its powers to make such 
orders with regard to that portion of the road within 
its own jurisdiction, as it may deem necessary for the 
best interests of all the parties in the different pro- 
ceedings. The court of ancillary appointment 
while, as a rule, it directs the receiver to follow the 
orders of the court of initial or original appointment, 
may disregard them and may direct the conduct of 
the receiver within its own jurisdiction, according to 
its own orders. 

Should the courts of the different States or juris- 



RECEIVERSHIP OF RAILROAD COMPANY 197 

dictions through which the road runs refuse to 
appoint the same person as receiver within their re- 
spective jurisdictions, then each may appoint its own 
receiver to act within its jurisdiction, under its direc- 
tion, and with or without regard to the orders of the 
other courts. 

But it is universally recognized that conflict and 
confusion must follow where concurrent receiverships 
control a railroad; therefore, notwithstanding the 
fact that each has the power to act independently of 
the others, the courts of this country, through the 
comity between them, as a rule, make ancillary 
appointments of receivers, and each directs the re- 
ceiver within its jurisdiction to carry out the orders 
of the court that first acquired control of the road 
and made the original or initial appointment. How- 
ever, each court will do so only when such orders 
are not against the public policy of its own State or 
do not conflict with or violate any of its own laws. 
They will try to follow the course of the court of 
initial appointment, so far as they consistently can, 
so that they may grant to their own citizens remedies 
and rights equal to those enjoyed by the citizens of 
that other State. 

Receivership of parent company and of branch or 
subsidiary lines. 

When a receiver has been appointed for the parent 
or controlling company of a system of railroads, the 



198 RAILROAD BONDS AND NOTES 

bondholders secured by mortgages on the branch, con- 
trolled, allied, or subsidiary lines or roads may have 
their own receiver for each mortgage to represent 
their respective interests in each of such roads or 
lines. 

Who is chosen as receiver; consent of parties; his 
qualifications. 

The courts select as their receivers those who are 
acceptable, so far as can be, to all parties. Some 
railroad mortgages provide that the holders of a cer- 
tain proportion of the outstanding bonds under that 
mortgage shall have the right to nominate a receiver. 
The person that the bondholders thus nominate, or 
that the parties to the litigation may have agreed 
upon, and urge upon the court for appointment, need 
not necessarily be its choice. However, the court is 
generally influenced by the consent of the interested 
parties; though it may ignore their suggestion and 
appoint whom it believes will best serve the interests 
of all concerned. The interests of creditors of all 
grades and of all persons who may be affected by the 
receivership are considered in the appointment. 

The court usually selects as its receiver a person 
of recognized ability and standing, in whose hands 
all can feel assured that their interests will be hon- 
estly and ably taken care of. He should be disin- 
terested. The court will not appoint any one whose 



RECEIVERSHIP OF RAILROAD COMPANY 199 

interests are opposed to those of the bondholders or 
others interested in the property. 

An officer of the railroad may be appointed re- 
ceiver. If the insolvency which caused the receiver- 
ship resulted from mismanagement of the affairs of 
the railroad company, the court will not appoint any 
one connected with that management. As skill and 
experience in the management of railroads together 
with a knowledge of the affairs of the road in ques- 
tion are desirable, the court may appoint an officer of 
the railroad company when its insolvency was not 
due to any fault on his part. 

Receiver represents the court; subject only to its 
control. 

The receiver represents no class of creditors; not 
even that class of creditors at whose instance he was 
appointed. His possession of the property in his 
care is that of the court that appointed him. The 
court holds the property with the hands of its receiver 
as its officer, and he is responsible to it for all his 
official acts. The receiver is the arm of the court 
doing its bidding. He is in no way subject to the 
direction of the railroad company, the trustee, the 
bondholders or any other creditors. 

The receiver must carry out the orders of the 
court as they are issued, from time to time, and his 
failure to do so may render him personally liable in 



200 RAILROAD BONDS AND NOTES 

money damages and also for contempt of court. 
His sureties become liable for any money loss suffered 
because the receiver does not carry out the orders of 
the court. 

General powers and duties of receiver while operat- 
ing the road; application to the court for in- 
structions and authority; what the court gen- 
erally allows the receiver to do. 

Immediately upon his appointment the receiver 
takes possession of the property covered by the mort- 
gage, and gathers all these assets. He should then 
proceed upon such a course as will save to the bond- 
holders, the other creditors, and all other persons in- 
terested financially, the largest amount in the short- 
est time. He should study carefully the problem, 
not only how to conserve the security of the bond- 
holders, but also how to serve the interests of the 
public. 

His appointment gives him the right to the imme- 
diate possession of the property over which he is ap- 
pointed. The court protects the receiver in his 
possession and control of the property it has placed 
in his charge, and any unjustifiable interference with 
him in the discharge of his duties and the possession 
of the property is a contempt of court, punishable by 
fine or imprisonment, or both. 

In continuing the business of the railroad com- 
pany, the receiver has substantially the same powers 



RECEIVERSHIP OF RAILROAD COMPANY 201 

as the railroad company has and is subject substan- 
tially to the same liabilities as it is. He has the 
right to use the charter under which the company 
operated. 

When the receiver is in doubt as to his rights or 
powers he should apply to the court that appointed 
him for advice and instruction. 

If necessary for the profitable operation of the 
road, the court may authorize its receiver to complete 
an unfinished branch line or other work. When ad- 
visable and likely to be productive of good results, 
the court may authorize the receiver to make traffic 
contracts with other companies or carry out those 
already made by the railroad company; also to lease 
property to others or to lease property from others, 
when necessary for the advantageous operation and 
management of the road. The court will also au- 
thorize him, under proper conditions, to borrow 
money to purchase rolling stock and materials and to 
pay for labor necessary for the operation of the road. 

The court may permit the receiver to settle or to 
compromise claims against the railroad company. 
Generally, the receiver should pay no claims against 
the railroad company unless permitted by the court. 

The court will ratify or subsequently approve any 
act done by the receiver without authority if it be 
such as it would have permitted if previously ap- 
plied to. Those contracts, expenses, or other acts 
which the court usually authorizes in the first in- 



202 RAILROAD BONDS AND NOTES 

stance, or subsequently ratifies or approves, are, gen- 
erally, those necessary to preserve the property and 
maintain the road in operation. 

Discretion of the receiver in the management and 
operation of the road. 

Should the receiver be compelled to obtain permis- 
sion from the court for every act incidental to the 
management and operation of a great business like a 
railroad it would seriously interfere with, if not pre- 
vent, the carrying out of the very objects of the 
receivership. It would necessitate the court passing 
upon every detail of the business and would take up 
its entire time to the exclusion of other litigation. 

Therefore, while the receiver is always under the 
control of the court, yet in the operation and manage- 
ment of the road, he is authorized by law to act 
according to his best judgment with respect to those 
ordinary and necessary matters arising incidentally. 
He is permitted a reasonable discretion. Under this 
discretion which the law gives him he may make re- 
pairs to keep the road in proper condition; he may 
dismiss any of the employees of the company and 
engage others in their places. He may engage legal 
counsel when necessary. As to such matters and 
those others that arise incidentally in the manage- 
ment and operation of the road he need not ask per- 
mission of the court, but may act according to his 
own discretion. 



RECEIVERSHIP OF RAILROAD COMPANY 203 

Effect of the contracts of the insolvent road on the 
receiver; leased lines; leases of rolling stock; 
car trust agreements. 

The contracts which the railroad company made 
while in possession and operation of the road con- 
front the receiver upon taking charge. Such con- 
tracts may be a lien on the property the receiver takes 
over; they are then binding on him to the extent of 
such lien. Where such contracts are not liens 
against the property the receiver is not bound by 
them unless he accepts and adopts them. That is, 
he may reject those he believes unprofitable or unde- 
sirable, and may accept those he believes beneficial. 
He must make his decision within a reasonable time 
after his appointment. His discretion, however, is 
neither arbitrary nor absolute nor uncontrolled. 
His action in this particular is subject to review by 
the court. He must act in good faith. 

The court will not permit him to accept and carry 
out those contracts that are prejudicial or which 
may diminish the assets or otherwise prove harmful. 
Should the receiver adopt or show an intention to 
adopt objectionable contracts, the interested parties 
who may be harmed thereby may apply to the court 
for relief. The official acts of the receiver are 
always subject to the control of the court. 

When the receiver takes over a railroad, he usually 
finds that the road is operating one or more lines by 
means of a lease, and using rolling stock under a lease 



204 RAILROAD BONDS AND NOTES 

or a "car trust" agreement. Rolling stock comprises 
the cars and locomotives used in conveying persons 
and property, that is, employed in the business of 
a railroad company. 

Whether or not the receiver shall continue to op- 
erate the leased line under the lease and adopt it is, 
under the rule stated, for him to decide. He has a 
reasonable time within which to make his decision. 
In the meantime he may continue to operate such 
leased line and his so doing will not be construed as 
an acceptance and adoption of that lease by him. 
However, while operating the road under the lease 
during this tentative period, he must pay for its use. 
If the lease is adopted then the receiver pays the 
amount agreed upon in such lease. Where the lease 
is ultimately rejected, then the court will fix the 
amount of compensation to be paid to the lessor of 
the leased road for the time the receiver used it. 
The amount that the court fixes is not necessarily at 
the rate mentioned in the lease, but is the fair and 
reasonable value for that period, depending upon the 
circumstances under which he took and operated such 
leased road. The amount ordered to be paid may 
be at the rate mentioned in the lease if that be the 
fair and reasonable value. 

The same rule applies to the rolling stock used by 
the railroad company under a lease. Should the 
receiver adopt the lease of the rolling stock or the 
court order him to do so, the rental mentioned in the 



RECEIVERSHIP OF RAILROAD COMPANY 205 

lease under which it was used must be paid. The 
receiver or the court may refuse to adopt the lease, 
whereupon the property is turned over to its owners ; 
however, should the receiver have need for this roll- 
ing stock, notwithstanding his rejection of the lease, 
he may continue using it. And for the time that he 
uses it, he must pay what its use is fairly and rea- 
sonably worth during that period. This fair and 
reasonable value may be at the rate fixed in the lease, 
though not necessarily so. The amount that the re- 
ceiver pays is what the court fixes. 

The rolling stock may be used by the railroad com- 
pany under a "car trust" agreement. Under such an 
agreement, the railroad company uses rolling stock 
belonging to an association, paying rent periodically 
for its use for a specified time (usually ten years), 
and on the understanding that at the end of that term 
the aggregate of all the rentals shall constitute the 
purchase price, and that thereupon the railroad com- 
pany shall become the owner of the rolling stock. 
The court may order the receiver to continue the 
payment of rentals and thus complete the purchase, 
which is usually done when the greater part of the 
sum has already been paid. See Car Trust Certifi' 
cates or Bonds. Page 316. 

Should the court deem it advisable not to continue 
this "car trust" agreement — which is usually done 
when only a small part of the purchase price has 
been paid — it may order the property turned over 



2o6 RAILROAD BONDS AND NOTES 

to its owners. However, the court may refuse to 
adopt the "car trust" agreement and yet direct the 
receiver to continue using such rolling stock; the 
receiver then pays to its owner what its use is fairly 
and reasonably worth for the period he uses it. 
What shall be the fair and reasonable value is deter- 
mined by the court. 

Such use of the property of another after refusing 
to be bound by the agreement under which it was 
originally taken may seem an arbitrary disposal of 
its owner's rights in his property, but it is justified 
on the ground that it is railroad property that the 
court has taken in its care, property charged with the 
obligation to continue as a public highway, in which 
those persons having private property rights are not 
alone interested, but in which the public is vitally 
concerned. And there are times, such as these, when 
public interests demand that private interests in 
property give way to them. Persons dealing with 
railroads or railroad property are charged with a 
knowledge of how the law regards property and cor- 
porations of this character and must have in mind 
what may follow. 

Expenditures by the receiver. 

The details of the management and operation of 
the road are left, to some extent, as was seen, to the 
discretion of the receiver. So, too, he is allowed a 
certain discretion as to expenditures in the course of 



RECEIVERSHIP OF RAILROAD COMPANY 207 

his receivership. This exercise of discretion must be 
characterized always by good faith. 

The receiver is permitted by law, widiout first 
obtaining permission of the court, to expend such 
moneys and incur such obligations for expenses as 
are necessary to preserve the property and operate 
the road in its ordinary management, provided they 
are not for a large amount or for an unusual pur- 
pose. 

When unusual matters arise or large expenditures 
are called for the receiver must apply to the court for 
permission to act. 

The necessity, the nature, and the amount of the 
expenditure determines its propriety. 

Expenditures for large amounts or for unusual pur- 
poses; making unusual contracts. 

Before acting in a matter involving a large amount 
the receiver should first get authority from the court 
to do so. The same rule applies to expenditures for 
unusual purposes. Nor should he make any contract 
that is unusual or which by its terms will extend 
beyond the probable period of his receivership, with- 
out permission from the court. Should the receiver 
make expenditures for a large amount, or for an un- 
usual purpose, or enter into a contract that is un- 
usual, without first obtaining permission from the 
court, he takes the risk of what the court will sub- 
sequently do in the matter. The court may approve 



2o8 RAILROAD BONDS AND NOTES 

his acts, or it may only partly approve them, or it 
may refuse entirely to sanction the expenditure or 
the contract in question. Should the court with- 
hold its approval, the receiver, having acted beyond 
the scope of his authority, will be held personally 
liable and the property in his care as receiver will 
not be bound by or charged with such contracts or 
expenditures. However, where the property has 
been actually benefited by such expenditure, the 
court may permit such sums as benefited the prop- 
erty to be allowed and to be paid as an expense of 
the receivership. 

With respect to expenditures for large amounts, 
or for unusual purposes, or the making of unusual 
contracts, the court will not authorize them in the 
first instance, nor subsequently approve them, unless 
they are necessary to preserve the property and main- 
tain the road in operation. 

Ordinarily, the court will not permit the receiver 
to expend money to complete unfinished work. The 
objection is that it is entering upon a new enterprise 
and casts upon the property in the hands of the re- 
ceiver an additional burden. But when absolutely 
necessary to preserve the property and prevent 
deterioration or loss, the court may, under some cir- 
cumstances, permit the receiver to complete unfin- 
ished work. On this proposition no fixed rule can 
be laid down ; the action of the court on the question 
of finishing uncompleted work depends upon the 



RECEIVERSHIP OF RAILROAD COMPANY 209 

particular facts and circumstances of each case be- 
fore it. 

Income during receivership; how applied; antici- 
pating income. 

The income taken in by the receiver is used first 
to pay the expenses of the receivership. Expenses 
of the receivership include the cost of maintaining 
and operating the road, wages of help, claims for 
repairs and materials furnished in the course of op- 
eration, and the rentals of leased lines and leased 
rolling stock. 

Should there be insufficient income to pay the 
expenses of the receivership, they may be charged 
against the property itself. 

Should there be sufficient income left after the 
expenses of the receivership are paid, to pay the in- 
terest that was defaulted on the bonds whose mort- 
gage is being foreclosed, or the interest accruing 
thereon and falling due during the foreclosure action, 
the court may order it paid; if not, or if the court 
cannot safely make such an order, it will not do so. 
And sometimes even though there be enough to pay 
the interest mentioned, it will be withheld by the 
receiver to meet operating expenses shortly to fall 
due or to be incurred; or it may be withheld to pay 
claims that, by law, are given a preference, and 
which the court may order paid first. 

Judgments and claims for injuries to persons or 



210 RAILROAD BONDS AND NOTES 

property caused by the receiver or his employees in 
the course of the operation of the road are also paid 
out of the income earned by the receiver as an ex- 
pense of the receivership. 

Should the income of the road be insufficient to 
meet current expenses, or to make repairs or improve- 
ments necessary to preserve the property, the court 
may anticipate future income by ordering the re- 
ceiver to borrow money and may secure such indebt- 
edness by making it a first lien upon the property in 
the possession of the receiver. 

The receiver borrows money, under these circum- 
stances, by issuing and selling receiver's certificates. 

Receiver's certificates ; only when absolutely neces- 
sary; unusual security; lien the court gives 
them; several issues; when payable; rate of 
interest; selling price; obligations of receiver; 
their form and transfer; enforcing their pay- 
ment; reasons for displacing bondholder's 
lien; notice to bondholders; entitled to be 
heard. 

The receiver ordinarily pays the expenses of oper- 
ating and maintaining the road during his receiver- 
ship out of the earnings of that period. However, 
when current income is insufficient to pay current 
expenses, or should money be needed to preserve the 
property by making improvements or otherwise keep- 
ing the road in a proper condition of efficiency, the 



RECEIVERSHIP OF RAILROAD COMPANY 211 

court may order the receiver to borrow money to meet 
these requirements. The receiver then under the 
direction of the court issues receiver's certificates, 
which are sold to raise the necessary money. Good 
results must be likely from the use of the money thus 
raised; and if such money is not absolutely necessary, 
the court will not order the certificates to be issued. 

It must be apparent that investors are not likely 
to lend money to be secured by property a mortgage 
upon which is already under foreclosure, and a re- 
ceiver appointed on the ground that the security is 
probably insufficient to meet the demands already 
against it. An extraordinary security must be of- 
fered. Therefore, for th^ payment of the receiver's 
certificates the court pledges its faith and the prop- 
erty in its custody, and gives these certificates such 
lien against this property, or priority in payment out 
of its proceeds, as the situation justifies. 

The court usually makes the receiver's certificates 
a first lien upon the franchise, income, and prop- 
erty of the road that is in its care, and orders that the 
certificates shall be superior to all other liens, except 
of course, those for public taxes. While the certifi- 
cates are usually made a first lien, the court may 
order that they be a first and prior lien only as to 
some of the liens against the property and a junior, 
subsequent, or inferior lien as to others. The or- 
der of the court authorizing the certificates states 
just what legal position or lien they shall have with 



212 RAILROAD BONDS AND NOTES 

relation to other liens and to the property against 
which they are charged. 

When some bondholders ask that receiver's certifi- 
cates be issued, and others do not join in that appli- 
cation, or they are issued against the protests of the 
latter, the court may place the burden upon those who 
originally asked for them. That is, it may direct 
that the certificates be a lien upon only such propor- 
tion of the property, or its proceeds, as the holdings 
of those bondholders who asked for the certificates, 
bear to the entire bonds outstanding and secured by 
that property; and that the certificates shall not af- 
fect the rights, or the interests, or the lien on the 
property, of those bondholders who have opposed 
the issue. But, as was seen, the court may, notwith- 
standing the objection of the dissenting bondholders, 
displace their lien and give the receiver's certificates 
a prior lien. 

Where there are several issues of certificates their 
respective ranks are fixed by the court. 

When the certificates are made a first lien they are 
paid out of the proceeds of the property they are 
charged against before any other claims, except 
those of a public nature, as taxes, are paid there- 
from; or the property may be sold subject to the lien 
of the certificates, when payment may be enforced 
out of the property in the hands of the purchaser; 
or they may be made a condition of reorganization 
of the road, whereby the new corporation shall be- 



RECEIVERSHIP OF RAILROAD COMPANY 213 

come liable for their payment and satisfy them in 
money or in securities of the new corporation. 

Should the proceeds of the property be insufficient 
to pay all the certificates of that issue in full, the 
holders share proportionately. 

Receiver's certificates are made payable either at 
a fixed time or when the property shall be sold or 
disposed of by the court. The order of the court 
authorizing the certificates states when they shall be 
payable, — at a fixed time or upon the sale or other 
disposition of the property. 

The rate of interest the certificates shall bear and 
the price at which the receiver may sell them is also 
fixed by the court. Should the court make no order 
permitting the receiver to sell at less than par, then 
he may not do so. Should the receiver sell at less 
than par, without permission of the court, the pur- 
chaser is entitled to demand and receive only what 
he actually paid. But if the court authorized 
their sale by the receiver at less than par, a purchaser 
at the authorized price is entitled to demand and re- 
ceive their face amount. 

Receiver's certificates are the obligations of the 
receiver and not of the railroad company. They 
may be made negotiable in form, that is, payable to 
bearer or to the order of a named payee and assigned 
by him in blank. They are not, however, ne- 
gotiable instruments in the strict legal sense of the 
term, such as promissory notes or bonds may be. 



214 RAILROAD BONDS AND NOTES 

When the certificates are payable to bearer they are 
transferable by mere delivery from hand to hand 
without any writing or any formality other than 
their manual delivery. When payable to order they 
are transferred by written assignment and delivery. 

As a general rule, the holder of the certificate is 
not entitled to sue for its payment by a separate 
action. His remedy usually is to apply for relief to 
the court that has the foreclosure proceedings in 
charge, and which ordered the certificates to be is- 
sued. But where the property is sold subject to the 
lien of the certificates, the purchaser thereby taking 
the property over subject to their payment, an in- 
dependent action will then lie against such property 
in the hands of its purchaser. 

It is an extraordinary power that the court as- 
sumes to exercise in displacing the lien and the 
priority of the bondholder's mortgage in favor of the 
certificates of the receiver. This power is exercised 
only in the cases of railroad and other quasi-public 
corporations. Corporations of this nature, though 
composed of private individuals united for private 
gain, are engaged in enterprises that serve the public 
and are immediately connected with the public wel- 
fare. The franchises or special privileges necessary 
to carry on the enterprises in which they are engaged 
are obtained from the people of the State. The 
people, therefore, who have given these valuable 
franchises are vitally interested in seeing that such 



RECEIVERSHIP OF RAILROAD COMPANY 215 

enterprises (as the exclusive means of transporta- 
tion of passengers and freight between certain ter- 
mini) shall continue in operation and that these 
special privileges or franchises shall not be neg- 
lected. Should a railroad suddenly cease operation, 
it would interfere with business and social life, ar- 
rest progress and developm.ent, and be a serious pub- 
lic loss, the extent of its harmful effect depending 
upon the size and location of the road. The rail- 
road company when it accepts its franchise from the 
people assumes the duty to maintain and operate the 
road and serve the public from whom it has accepted 
this special privilege. And it is this duty and that 
it shall be performed, that the court has in mind, to 
a great extent, when it appoints a receiver to con- 
tinue the road in operation and permits him to bor- 
row money to do so. And all persons are charged 
with a knowledge of this duty to continue maintain- 
ing and operating the road; and all persons are 
charged also with the knowledge that when neces- 
sary to carry out this duty, the receiver may be per- 
mitted to borrow money, and to secure same may 
issue certificates which may be made a first lien on 
the property of the railroad corporation, displacing 
the liens of mortgages to secure bonds. 

And from the standpoint of the bondholders it 
may be urged that rapid diminution of the value of 
the property covered by their mortgage would follow 
if it were not for the timely aid of the money raised 



216 RAILROAD BONDS AND NOTES 

by the certificates. The true value of railroad prop- 
erty lies in its worth as a going concern and in its 
income earning capabilities. And while it may seem 
a hardship on the bondholders to have their lien dis- 
placed by the certificates, it must be remembered that 
the money raised by them comes at a time when it 
can be used most advantageously to give life to the 
security and to continue it in existence, or to make it 
more efficient, and thus produce better results than 
would have been probable without it. 

Nevertheless, the courts approach the subject of 
receiver's certificates with great caution as the cer- 
tificates may defeat the very purpose for which they 
were employed. For, while they are intended to 
preserve and improve the mortgaged property and 
enhance its value by keeping it going as an income- 
producing business so that the bondholders who have 
had their lien displaced may realize more than they 
would have done if their property had been left in its 
original condition, it has happened that such results 
have not followed and that bondholders have been 
"improved" out of the equity they originally had in 
the property. It, therefore, must be shown to the 
satisfaction of the court that the saleable value of 
the property will be increased as a result of the use of 
the money to be obtained by the certificates, before 
it will order that they be issued. The court will 
refuse to order certificates if it believes the result 
doubtful. 



RECEIVERSHIP OF RAILROAD COMPANY 217 

The condition of the property may be such that 
the court may consider it more advisable to stop run- 
ning the road and hasten matters to a foreclosure 
sale. 

Accordingly, receiver's certificates are issued only 
when absolutely necessary and when good results are 
likely. And the purpose for which they are issued 
is limited to raise money to preserve, to repair, and 
to equip the road and to maintain it as a going con- 
cern. Courts will not, as a rule, order certificates 
to be issued to complete unfinished work beyond 
what is necessary for the preservation of the property 
in its care. 

Before the court permits the receiver to issue cer- 
tificates, the bondholders must receive notice of the 
application and must have an opportunity to be 
heard. They are entitled to their day in court. 
Bondholders are protected in the security that the 
lien of their mortgage gives them and this priority 
will not be taken from them without their consent. 
However, to depend upon an actual consent would 
often defeat the issuance of the certificates. The un- 
warranted and unfounded objection of some of the 
bondholders is not permitted to interfere with nor 
to thwart an act intended for the good of the greater 
number and the public, and in which the court seeks 
to safeguard the interests of each individual as well. 

At the hearing the bondholders are entitled to 
show that the certificates are not necessary and, 



2i8 RAILROAD BONDS AND NOTES 

among other objections, to urge that they will do 
more harm than good to the security, that the amount 
for which it is intended to issue them is excessive, 
that they should not be given a rank superior to the 
lien of the mortgage being foreclosed. 

When the affairs of the railroad company have 
reached a receivership, the bondholders usually place 
their interests in the hands of a committee. Such a 
committee is then the representative of the bondhold- 
ers to the extent that they are bound by whatever it 
does in their behalf while acting within the scope of 
its authority. This committee usually has the power 
to consent, if in its judgment it be advisable, to the 
issuance of receiver's certificates. Such committee 
does not represent those bondholders who have not 
consented to it acting for them. Those bondholders 
who are not parties to the agreement which ap- 
pointed the committee are not bound by the acts or 
consents of this committee. 

The order which the court makes authorizing the 
certificates and fixing their lien is such as, under the 
circumstances, it believes will best serve the interests 
of all the parties. 

If the certificates are issued beyond the amount 
authorized, the excessive part of the issue is void; 
but if the money received from the sale of such ex- 
cessive part has been used to benefit the property, 
the court will aid their holders to get their money. 
Records of the court are accessible to all persons who 



RECEIVERSHIP OF RAILROAD COMPANY 219 

may satisfy themselves whether or not the certificates 
have been regularly issued. 

Official liability of the receiver; his personal lia- 
bility. 

In operating the road, the receiver, through his 
representatives, may cause injury to persons or prop- 
erty; or he may employ help, or purchase materials, 
equipment or other property. When he is acting 
thus, he is acting in an official capacity; he then is 
officially liable only. That is, to pay such damages 
caused persons or property, or to pay such wages for 
help, or to pay the purchase price of such material 
or other property, only the property in his possession 
as receiver (official property), can be reached. He 
is not personally liable in such matters, and neither 
is he nor are his sureties liable on the receiver's bond. 
These are receivership liabilities, incurred while act- 
ing as an officer of the court, and they must be paid 
only out of receivership property. 

The receiver, however, is personally liable if he 
personally caused the injuries or the damages just 
mentioned ; or if he failed to exercise reasonable care 
in the selection of the employees who did. He is 
also personally liable if he pledged his individual 
credit in the hiring of help or the purchase of any 
property. 

The railroad company is not liable for the acts of 
the receiver where he is in entire possession and con- 



220 RAILROAD BONDS AND NOTES 

trol. The railroad, therefore, is not liable for in- 
juries to persons or damages to property while the 
road is operated exclusively by the receiver. 
Should the receiver and the railroad company jointly 
operate the road the latter continues liable. 

Liability of sureties on receiver's bond. 

The receiver may be required by the court to turn 
over certain property, or to make certain payments, 
or to do other acts specified in its order. Should he 
fail to obey the orders of the court in any of these 
particulars, then those who are entitled to receive 
such property or such payments, or to the benefits 
of such other acts, may recover from the receiver, 
personally, damages for any loss they may suffer by 
reason of his failure to obey the orders of the court 
in such respect. These orders are directed against 
the receiver personally. If it be shown that the 
receiver cannot pay such damages, then the sureties 
on the receiver's bond are liable ; and upon obtaining 
permission of the court they may be sued on their 
bond. 

Accounting by the receiver. 

The receiver must render an accounting to the 
court that appointed him. Each person interested 
in the receivership is entitled to know, from time to 
time, what the receiver is doing. 

He must keep his accounts and vouchers for pay- 



RECEIVERSHIP OF RAILROAD COMPANY 221 

ments made by him so that all persons interested 
may examine them at reasonable times. 

At the conclusion of the receivership, the receiver 
renders his final accounting; and he must also ac- 
count at such other times, and as often as the court 
directs him to. A failure to comply with the order 
of the court in this respect is cause for his removal. 

The accounting of the receiver is filed with the 
court for its approval. Any person interested as a 
party or claimant may object to any or all of the 
items of the accounting. A hearing is had before 
the court on these disputed items. Sometimes the 
court itself passes on these items in dispute ; usually 
the accounting is sent by the court to a referee or 
master to examine into all items, disputed and other- 
wise. The referee or master reports his findings to 
the court for final approval or disapproval. In 
passing upon the accounting the court specifies the 
sums it allows for compensation to the receiver, to 
legal counsel, and for other services. 

The books of the railroad company in the pos- 
session of the receiver should be open at all reason- 
able times to the inspection of the parties interested. 

Removal of the receiver ; his resignation. 

The court that appointed the receiver may remove 
him from office. Any attempt on his part to ad- 
vance his own personal interests at the expense of 
the property or funds in his care is cause for his 



222 RAILROAD BONDS AND NOTES 

removal. So, too, is his collusion or any other im- 
propriety in procuring his appointment. The in- 
competency of the receiver is ground for his removal. 
A mere error in judgment, where there is no bad 
faith, will be pardoned. But should errors of judg- 
ment show a lack of capacity, the court will remove 
the receiver. Failure of the receiver to render an 
accounting when ordered to do so by the court is 
sufficient cause for his removal. 

Generally, the receiver will be removed for any 
misconduct that subjects the property to danger. 

Should there be more than one receiver, a lack of 
harmony among them that menaces the rights of the 
bondholders and the others concerned in the receiver- 
ship is good ground for the removal of all. The 
court then usually appoints one receiver in their 
stead. Other situations may arise when the court 
may deem it advisable that the receivership be placed 
in different hands for management. 

As has been said so many times, the receiver is the 
officer of the court and bound to do its bidding, and 
when he has undertaken his duties he may not avoid 
them arbitrarily by resigning. He must obtain per- 
mission of the court to resign. The courts usually 
give the receiver permission to resign, under proper 
circumstances, and then appoint another in his place. 

The removal of the receiver does not in any way 
affect the receivership. The rights of all remain the 
same. The only change that takes place is that the 



RECEIVERSHIP OF RAILROAD COMPANY 223 

court now acts through a new receiver in place of the 
deposed one. 

Compensation of the receiver; fixed by statute or 
the court ; forfeiting compensation ; paid out of 
property or by contribution. 

The receiver is allowed compensation for the 
services rendered by him in the proper discharge of 
his duties. 

In some of the states the rate of compensation is 
fixed by statute. He is then paid according to that 
rate. 

When there are no statutes fixing the rate of com- 
pensation, it is determined by the court. In doing 
so, the court considers the amount of work the 
receiver actually and necessarily did, the manner in 
which he performed his duties, the fidelity and busi- 
ness capacity he brought to bear, the amount in- 
volved, and the responsibilities he assumed. The 
court bases its determination upon the particular facts 
of each case. The court allows a lump sum. The 
percentage basis of compensation is not used by the 
court. And in arriving at that sum the salaries paid 
to public officers for similar services are sometimes 
used as a standard. The salary of the president of 
the road has in some cases been considered a measure 
of compensation. In some instances this would be 
insufficient and in others excessive. As has been 
said, each case depends upon its own particular facts. 



224 RAILROAD BONDS AND NOTES 

Where the misconduct of the receiver has been 
such that the court believes he is not entitled to any 
compensation, having forfeited it by his misbehavior, 
it may refuse him any compensation whatever. 

The receiver is compensated out of the property 
in his charge. Should that property fail or be in- 
sufficient to adequately compensate the receiver, then 
the bondholders and those others at whose instance 
he was appointed must provide, by assessment or con- 
tribution, the money necessary for his payment. But 
where the receivership was procured by the bond- 
holders under a second mortgage, the prior mortgage 
bondholders are not assessed or otherwise held to con- 
tribute unless they took an active part in the liti- 
gation. 

Termination of the receivership. 

The receivership serves but a temporary purpose : 
it comes to an end when its objects have been accom- 
plished. Then, there being no further necessity for 
its existence, the court will discharge the receiver, 
and relieve him from further liability. The receiver 
is usually discharged after the foreclosure sale or 
when the reorganization of the road has been carried 
out. There is then no longer any property to take 
care of and there is no longer need for his services. 
The receiver now renders his final accounting and is 
discharged by the court, unless it believes it is neces- 
sary to continue him in office for a while to close up 



RECEIVERSHIP OF RAILROAD COMPANY 225 

other matters that may have arisen. When the re- 
ceiver shall be discharged and the receivership termi- 
nated rests in the sound discretion of the court. The 
receivership must not be prolonged unnecessarily ; but 
it will be continued so long as the court believes there 
is need for it. 

The moneys the receiver takes in during his opera- 
tion of the road, and the proceeds of the sale of the 
property under foreclosure or otherwise, are dis- 
tributed under the direction of the court. Usually 
there are many claims of different kinds. Some are 
entitled to be paid out of certain property, or its pro- 
ceeds, to the exclusion of all others. Sometimes sev- 
eral classes of creditors are entitled to share propor- 
tionately in a fund; sometimes they share according 
to their respective priorities or preferences, as to 
which there may be a conflict. These priorities or 
preferences in payment depend in some instances 
upon the fact that the mortgage or other lien which 
gives them such priority or preference attached to 
the property in question before the lien of the others; 
or because of the nature of the claims ; or because by 
order of the court they have been made a charge 
against certain property; or because some bondhold- 
ers, having a certain priority, consent to waive it in 
favor of others who have advanced money to the 
road at a later and critical time; or because of such 
other reasons as the complex conditions that the in- 
solvency of the road presents. 



226 RAILROAD BONDS AND NOTES 

These priorities and preferences in payment out of 
the property and funds before the court, and the 
reasons for each, and the general rules applied in the 
distribution of the assets of the insolvent railroad 
company, are discussed in the following chapter. 



CHAPTER VII 

RIGHTS AND REMEDIES WITH RELATION TO THE 
ASSETS OF THE INSOLVENT RAILROAD COM-* 
PANY; RIGHTS AND PRIORITIES OF THE OTHER 
CREDITORS 

General rules of distribution of assets of the insol- 
vent road ; mortgages and other liens ; secured 
and unsecured creditors. 

As a general statement it may be said that such 
property of the insolvent road upon which there are 
mortgages or other liens is reserved to the payment 
of the claims secured by these mortgages or other 
liens; and such claims so secured are paid in full, 
according to their respective priorities, out of that 
property before any other creditors receive anything 
from it. 

When a mortgage is foreclosed and property is 
thus before the court, it orders it sold and the pro- 
ceeds of the sale are distributed under its direction 
to those whom it finds to be entitled thereto. 

When the property is sold under foreclosure, the 

costs and expenses of the foreclosure action and of 

the sale are paid first. Then those claims are paid 

227 



228 RAILROAD BONDS AND NOTES 

that the statutes of the State give preferences to, and 
those which the court orders to be preferred. After 
claims of these classes are paid in full, the balance 
of the proceeds of the property is applied to the pay- 
ment of those who have mortgages or other liens 
against the property sold. These claims secured by 
such mortgages or other liens are paid according to 
their respective legal ranks and priorities. After all 
these claims are paid in full the balance, if any, is 
paid to the general or unsecured creditors. Should 
there be anything left after all these payments are 
made in full, it is turned over to the railroad com- 
pany. 

In addition to those creditors who have secured 
themselves by mortgages or other liens, and those to 
whom the statutes of the different States give a 
preference and priority, there are claims, such as re- 
ceiver's certificates and operating expenses, to which 
the court may give a certain preference out of income 
or property itself, depending upon the circumstances 
of each case, and which it orders paid sometimes 
before the bondholders and the coupon holders under 
the defaulted mortgage. 

Each class of creditors is paid in full before those 
of the succeeding class receive anything. 

Should there not be enough to pay all the cred- 
itors of a class in full, they share proportionately. 
For any unpaid balance they become general or 
unsecured creditors; they then share proportionately 



PRIORITIES OF THE OTHER CREDITORS 229 

with the other unsecured creditors in whatever fund 
that may be left for such unsecured creditors. 

The funds to which the general or unsecured cred- 
itors have recourse are those produced by the pro- 
ceeds of all property upon which there are no mort- 
gages or other liens ; and in addition all that remains 
of property upon which there are mortgages or 
other liens, after such mortgages and other liens have 
been satisfied in full. 

Claims not yet due are also paid, but with a reduc- 
tion of interest for the unexpired period. 

Income earned by the railroad company before de- 
fault ; after default ; income earned by receiver. 

We have just seen generally how the property of 
the insolvent road, when sold under foreclosure, is 
distributed. To the distribution of certain income 
that the road earns, rules are applied that should 
receive separate consideration. 

The railroad company is entitled to the income it 
earns, as against the bondholders, while it is in pos- 
session and operates the road. This is so even when 
the income is mortgaged and specifically included 
in the mortgage. Mortgaged income means net 
income. Net income is what is left of current in- 
come after payment of expenses necessary to produce 
it. See Operating expenses prior to receivership. 
Page 245. For it is the duty of the railroad com- 
pany while in operation to apply its current income 



230 RAILROAD BONDS AND NOTES 

to the payment of its current expenses. Its current 
income, therefore, after the payment of the current 
expenses necessary to produce it, thus making it net 
income, belongs to the railroad company until it 
defaults under the mortgage and the receiver under 
order of the court or the trustee under the mortgage, 
as the case may be, demands possession of the mort- 
gaged property. Thereupon it belongs to such re- 
ceiver or trustee. 

Even when mortgaged, the trustee or the receiver, 
as the case may be, is entitled only to the income 
earned after the company defaults under the mort- 
gage and such trustee or the receiver has demanded 
possession. 

Should the railroad company turn over any income 
to the receiver then these moneys, together with such 
income as he may earn himself, are applied generally 
first to the expenses of the receivership. Such ex- 
penses include all costs of the foreclosure action, 
reasonable compensation for the receiver and his 
legal counsel, and the other necessary expenditures 
to properly maintain and operate the road. 

Accordingly, claims of employees for wages, 
claims for materials furnished and for work done 
during the receivership are paid as its expenses. 

Those claims for labor and materials furnished to 
the railroad company during the period of about six 
months prior to the receivership which were neces- 
sary to maintain and preserve the mortgaged prop- 



PRIORITIES OF THE OTHER CREDITORS 231 

erty, and which come under the classification of 
"operating expenses," are also paid out of the income 
thus in the hands of the receiver. See Operating 
expenses prior to receivership. Page 245. 

Claims or judgments for damages for injuries to 
persons or property caused while the road was oper- 
ated by the receiver are also regarded as expenses 
of the receivership; but claims or judgments of this 
kind caused by the negligence of the railroad com- 
pany while it operated the road are regarded quite 
generally as unsecured claims against the road, and 
are not paid by the receiver out of his income, except 
in those few States where statutes give judgments of 
this nature a preference. See Claims and judgments 
for injuries to persons or property. Page 260. 

When the income in the hands of the receiver has 
paid all the expenses of the receivership and such 
other claims as may be specifically charged against 
it, then the balance, if any, goes to the holders of the 
bonds under the foreclosed mortgage and the other 
creditors according to their respective rights. 

Distribution of income and proceeds of mortgaged 
property when trustee takes possession, op- 
erates, or sells. 

The trustee may take possession of the mortgaged 
property upon default of the railroad company, when 
such power is granted him in the mortgage. 
Coupled with this power to take possession, he is also 



232 RAILROAD BONDS AND NOTES 

usually authorized to operate the road. See Posses- 
sion and operation of the mortgaged road by the 
trustee^ etc. Page 154. 

The income that the trustee earns while operating 
the road, and such income as he may have received 
from the railroad company, together with the pro- 
ceeds of the mortgaged property, by sale, lease, or in 
the case of stocks and bonds, as dividends or interest, 
are distributed by him in the manner that the mort- 
gage points out. 

The trustee has no authority to take possession of 
the road or to operate it or to sell it unless the mort- 
gage gives him that power; and this same mortgage 
that authorizes him to do so also regulates how the 
moneys received or realized as a result of the exercise 
of such power shall be distributed. 

The moneys received by the trustee, from all 
sources under the mortgage, are usually ordered dis- 
tributed by the mortgage so that they shall be applied 
first to the payment of the expenses of the sale and 
of the trusteeship, which shall include all necessary 
expenditures, covering also his own compensation 
and that of his legal counsel; then to those claims 
that the statutes or the courts give preference to; 
after these, to the payment of mortgages or other 
liens having priority over his mortgage. When the 
property is sold free and clear of such prior mort- 
gages or other liens, the full purchase price is actu- 
ally paid and such prior mortgages or other liens are 



PRIORITIES OF THE OTHER CREDITORS 233 

then first paid in full out of, or their lien transferred 
to, the purchase price so paid. 

When the property is sold subject to such prior 
mortgages and other liens, their amounts are taken 
into consideration when the actual amount of the 
purchase price is to be paid, and the actual cash or 
other payment is reduced accordingly. Then the 
purchaser must satisfy these prior mortgages or other 
liens himself, only, however, to the extent that the 
property purchased will do so. His liability is not 
a personal one; the property rather than the pur- 
chaser is liable. Should that property be insufficient 
to meet such demands in full, then the purchaser is 
not liable for such deficiency, but for such unpaid 
balance these mortgagees and lienors are creditors of 
the railroad company. Sometimes, however, usually 
in reorganization proceedings, the purchaser may 
assume the payment of the claims secured by such 
mortgages and other liens subject to which the prop- 
erty was purchased; then such purchaser, having as- 
sumed these debts secured by such mortgages or other 
liens, is personally liable notwithstanding that the 
property is insufficient to pay them. 

Should the property be sold free from all prior 
liens and mortgages, and the trustee has paid all such 
claims, so secured, in full, then he applies the bal- 
ance to the satisfaction of the bonds and coupons or 
claims for interest under his mortgage. He usually 
pays such principal and interest, with interest on 



234 RAILROAD BONDS AND NOTES 

overdue interest, without preference to either prin- 
cipal or interest. Should there be insufficient to pay 
principal and interest in full, then they share pro- 
portionately, on an equal basis. The order of dis- 
tribution just given is that most common, though 
some mortgages may make other arrangements as to 
payment of principal and interest, or the priorities 
between them; but the mortgage cannot disturb or 
affect the rights or priorities to which others who are 
not parties to such an arrangement are entitled. 
See Friorities^ if any^ between principal and interest. 
Page 92. See also Priorities among interest cou- 
pons and claims for interest. Page 260. 

Creditors of the railroad generally; what is meant 
by priority. 

The average railroad company consists of a num- 
ber of branch lines operated as a system. 

Upon insolvency it will be found that its property 
is encumbered by a number of mortgages and other 
liens of different kinds and legal ranks ; there will be 
claims that are given a preference in payment out of 
the assets of the road, either by law or by order of 
the court; and there will be found those creditors who 
have no security or preference. 

To ascertain the rights of whomsoever may claim 
any interest in the property of the railroad company, 
or against the road, and determine their relative pri- 
orities, is the task that confronts the court at this time. 



PRIORITIES OF THE OTHER CREDITORS 235 

Among the creditors having mortgages or other 
liens there may be found the holders of bonds se- 
cured by the underlying liens placed by constituent 
companies on the branch lines they owned before 
consolidation; also first, second, general or blanket 
mortgages on the entire system. Collateral trust 
bonds may have been issued by the parent company, 
to secure which are pledged stocks and bonds from 
its own treasury or the stocks and bonds of its sub- 
sidiary companies. Car trust certificates or equip- 
ment bonds may be outstanding covering the equip- 
ment of the road. The terminals may have been 
mortgaged to secure an issue of terminal bonds. 
Some of the creditors may have reduced their claims 
to judgment, they are then secured by the lien of 
their judgments. The interest on preferred stock 
may have been made a lien on the property of the 
corporation or some of it. The claims under pur- 
chase money mortgages must be considered. Claims 
for labor or materials furnished, under some condi- 
tions, are entitled to a preference under the law of 
some of the States. Claims or judgments for in- 
juries to persons or property caused in the operation 
of the road by the company are given a preference 
under the law of some of the States. Mechanics' 
liens may be charged against the property of the road. 
The claims for operating expenses, preferred by order 
of the court, and the lien that the court gives receiv- 
er's certificates are matters for consideration. And, 



236 RAILROAD BONDS AND NOTES 

too, the claims for unpaid taxes and other govern- 
mental charges, and for the expenses of the receiver- 
ship and of the trusteeship, are to be taken into ac- 
count, as they are given a priority over the other 
indebtednesses of the road. And in addition to the 
relative rights of these secured creditors of different 
kinds and ranks, there will be found the general or 
unsecured creditors, including perhaps the holders of 
notes or debentures of the insolvent road. 

To the discussion of the respective priorities of 
these different classes of creditors, and their rights 
in the assets of the insolvent road, this chapter is 
addressed. 

By priority in payment out of certain property is 
meant the right to receive payment in full out of 
that property before those following next in rank 
receive anything from it. 

The right to priority in payment out of certain 
property depends upon a mortgage or other lien 
against that specific property in favor of the creditor 
claiming such priority. 

Priority among several mortgages or other liens 
depends, generally speaking, upon the time when 
they attached to the property. A mortgage or other 
lien usually attaches to property at the time when the 
document granting it is recorded in the office of the 
public oflScer designated by law for that purpose. 

The rights of bondholders and all others secured 
by mortgage or other lien, relates back to the time 



PRIORITIES OF THE OTHER CREDITORS 237 

when the instrument granting the lien was recorded. 
Nothing that the railroad company can do in the 
way of incumbering the property after that can affect 
the security that such mortgage or other lien gives. 

There are some claims, however, that, by reason 
of their nature, are given priorities and are sometimes 
preferred over some liens already existing. Re- 
ceivers' certificates and sometimes claims for operat- 
ing expenses come under this heading. Taxes, pub- 
lic assessments, and other governmental charges are 
always preferred and paid before all other liens and 
claims. 

Creditors having a prior lien may waive it in favor 
of those having a later lien ; this is sometimes done in 
the reorganization or readjustment of the road. 

Claims of employees of the road for services ren- 
dered prior to the receivership in most States are 
given a preference. And where such statutory pref- 
erence is not given, and they are not to be included 
under the head of operating expenses, they are 
usually paid by the receiver upon consent as a neces- 
sary expedient in continuing the road in operation 
as he depends upon their services and skill; and 
those who purchase the road at foreclosure, or reor- 
ganize it, also do so on the ground that they have the 
advantage of a fully equipped complement of em- 
ployees to take care of the management and details 
of the road. Quite generally when the claims of 
employees are for the physical labor necessary to 



238 RAILROAD BONDS AND NOTES 

maintain and operate the road, for the six months or 
any part thereof prior to the receivership, they may 
be given a preference. See Operating expenses prior 
to receiverships etc. Page 245. 

Creditors on equal footing. 

Between creditors of equal standing, the estab- 
lished rule universally applied by the courts is that 
distribution shall be made proportionately among 
them. Their rights are equal and each shares pro- 
portionately in the fund to be distributed among 
them as a class. 

Should there be insufficient to pay all in any one 
class, then each of that class bears the loss propor- 
tionately. 

Successive mortgages or other liens; waiving prior- 
ities. 

As between bondholders or other creditors secured 
by successive mortgages or other liens against the 
same property, the rule is that the mortgage recorded 
first shall be entitled to priority and the claims under 
it shall be paid first, in full, out of that property 
before the claims under the mortgages or other liens 
succeeding it shall receive anything. As to other 
property of the road upon which they have no lien 
they stand on an equal footing. 

The railroad company has no power to give to a 
later mortgage, no matter for what purpose, any 



PRIORITIES OF THE OTHER CREDITORS 239 

rights that can supplant or displace the lien of a 
prior mortgage. 

The bondholders under a prior mortgage, however, 
may consent to waive their priority in favor of a sub- 
sequent one. This is sometimes done in adjusting 
the affairs of an insolvent railroad company. These 
bondholders may believe that the financial embar- 
rassments of the company will be met and overcome 
with some assistance and, therefore, do not enforce 
their mortgage, though they have the right to do so, 
but consent to give priority to a later mortgage to 
secure an issue of bonds or notes that will raise 
money to relieve the road from what apparently is a 
temporary stress. See Prior lien bonds; preferential 
bonds. Page 326. 

Only those bondholders under the prior mortgage 
who consent will be affected. Those who do not 
consent will retain their priority. It is a question of 
policy whether or not the bondholders will consent. 
The trustee under the mortgage has no power to bind 
a bondholder by his consent in this regard. 

Closed mortgages; open end mortgages; bonds in 
series; open mortgages. 

Railroad mortgages may be given to secure a speci- 
fied or limited aggregate amount of bonds, all of 
which are put out at once. This is termed a closed 
mortgage. The holders of such bonds stand on an 
equal footing and share proportionately in the secur- 



240 RAILROAD BONDS AND NOTES 

ity that such mortgage gives them in the absence of 
any special arrangement to the contrary. 

An issue, however, may be for a specified limited 
aggregate amount but all the bonds may not be put 
out at once. The mortgage securing such an issue is 
called an "open end" mortgage, though technically 
it is a closed mortgage as the total aggregate amount 
is limited. The issue is for an amount somewhat 
larger than the present needs of the railroad com- 
pany. Its object is to provide for present purposes 
and to avoid the necessity of another mortgage when 
more money is needed in the near future, as, for in- 
stance, to retire underlying securities or to meet fu- 
ture requirements of the road. The bonds are then 
put out in series, under the terms of the mortgage, 
to meet the needs of financing or equipment as they 
arise. Usually bonds for a certain amount are put 
out on the execution and delivery of the mortgage; 
and upon a specified later date, or at the request of 
the board of directors of the road, or at such other 
times or upon such other happenings or events as the 
mortgage shall provide, another series in a fixed sum 
is put out and so on until the entire issue is nego- 
tiated. All fall due at the same time. 

In the absence of any provision in the mortgage to 
the contrary, all the bonds of such an issue stand 
upon the same footing without regard to when they 
were put out or negotiated. The mortgage, how- 
eyer, may provide that bonds of one series shall have 



PRIORITIES OF THE OTHER CREDITORS 241 

priority over those of another. As a quite general 
rule there is no distinction made. 

Bonds of an issue of this kind are to be distin- 
guished from "serial bonds," as they are usually 
called, which are issued under a mortgage which pro- 
vides that each series shall fall due at different times, 
each running for a specified period. See Numbered 
bonds. Page 241. 

Where a mortgage is made by a railroad company 
on its property to secure bonds, but there is no 
amount specified or limited, the company may issue 
as many bonds as it desires, its only limitation being 
that put on it by the statutes that exist in most States 
by which railroad companies shall not have out- 
standing at any one time a bonded indebtedness be- 
yond a certain proportion of its authorized capital 
stock, its paid in capital stock, or its property, as the 
case may be. Mortgages that contain no limitation 
as to the aggregate amount are called "open mort- 
gages." They are rare. 

Numbered bonds. 

Railroad bonds are usually numbered. 

When numbered bonds bear the same date and are 
alike except as to the numbers, it is presumed that 
they are numbered not for the purpose of giving one 
number any priority over another, but merely for 
convenience in registration and to aid identification. 
There is then no distinction between them and they 



242 RAILROAD BONDS AND NOTES 

all stand on the same footing and each is entitled to 
its proportionate share and rights in the security. 

In issues of railroad bonds, numbers are often 
given a significance and form part of the contract be- 
tween the railroad company and the bondholder. 
This is where the issue is divided into classes and dis- 
tinguished by numbers and sometimes by letters, and 
one class is given certain rights and preferences that 
the others do not enjoy. Under such an arrange- 
ment the bonds distinguished by a certain letter, or 
those between certain numbers, may be redeemable 
and called in before the others, or they may have 
certain rights and privileges that the others have not. 

Notwithstanding these special rights and privi- 
leges that they may possess or those obligations they 
may be subject to, if there be nothing in the mortgage 
to the contrary, these bonds are all of equal standing, 
all equally secured by the mortgage, and all are en- 
titled to share proportionately in the security. 
When serial bonds, or bonds subject to calling in, 
are called in under the provision to that effect in 
the mortgage, it is usually there provided that after 
the date on which they should be surrendered or 
fall due, they shall thereafter no longer be secured 
by the mortgage, nor draw interest from such due 
date. See Payment of serial bonds; bonds issued 
in series. Page loo. See also Redeeming bonds or 
calling bonds in. Page 98. 

Serial bonds are to be distinguished from bonds 



PRIORITIES OF THE OTHER CREDITORS 243 

issued in series. The terms are not always accu- 
rately employed. In the case of bonds issued in 
series, they all fall due on the same date, though 
they are put out at different times; in the case of 
serial bonds, they are all put out at the same time, or 
at such times as the mortgage shall provide, but they 
fall due in series at certain specified times, each 
series running for a different period. 

Over-issued bonds. 

Railroad bonds are sometimes issued in excess of 
the amount to which the issue is limited. The over- 
issued bonds are good in the hands of a bona fide 
holder who has paid value and bought them in the 
usual course of business before their maturity, in 
good faith, and without notice or knowledge that 
there was anything wrong. A bondholder meeting 
all these requirements is entitled to have his bonds, 
though over-issued, share proportionately in the se- 
curity of the mortgage. 

Over-issued bonds are void in the hands of one 
who is not a bona fide purchaser, as just described. 
See Validity of bonds. Page 18. 3ee also Trus- 
tee's certificate. Page 70. 

Re-issued bonds; exchanged bonds; substituted 
bonds. 

Unless forbidden by its charter or by law, a rail- 
road company may buy in its own bonds and re- 



244 RAILROAD BONDS AND NOTES 

issue them. Such bonds when re-issued possess the 
same rights under the mortgage that they had before 
the railroad company acquired and put them out 
again. 

Sometimes in the adjustment of the affairs of a 
railroad company, the bonds of an issue secured by a 
mortgage may be exchanged for bonds of a new issue. 
The question may then present itself: Are the new 
bonds secured by that mortgage? 

This depends entirely upon the intention of the 
parties when the exchange was made as shown by the 
facts and circumstances surrounding the transaction. 
If it was intended that the whole debt secured by the 
mortgage should continue, then the transaction is 
merely a substitution of the new bonds for the old 
ones, and the new bonds are entitled to all the rights 
under the mortgage that the original bonds had. 
The mortgage continues to secure the old debt which 
has now taken a new form. However, if the inten- 
tion was that the debt evidenced by the old bonds 
was to be extinguished, and the new bonds were 
issued not in exchange but in payment of them, then 
the original mortgage does not secure such new bonds. 
The instances discussed are those where one issue is 
exchanged for another, and do not have reference to 
the exchanging of a coupon bond for a registered 
bond, or vice versa, as is usually permitted. They 
are of the same issue. 



PRIORITIES OF THE OTHER CREDITORS 24^ 

New mortgage before all bonds under prior mort- 
gage are put out. 

Before all the bonds secured by a railroad mort- 
gage are put out, a new issue may be made and be 
secured by a mortgage which is a later lien. All the 
bonds under the first mortgage are entitled to the 
protection of its lien, no matter when they were put 
out or negotiated, in the absence of any understand- 
ing to the contrary ; and as its lien is prior to that of 
the later mortgage, the holders of the bonds of such 
first issue, who receive their bonds before their ma- 
turity, though after the execution and recording of 
the later mortgage, are entitled to priority over the 
holders of the later issue. 

The later issue does not operate to retire the bonds 
of the prior issue not yet put out. The holders of 
the bonds of the later issue might have protected 
themselves as against the bonds of the prior issue 
not yet put out, by demanding that they be destroyed 
before their issue is negotiated. 

Operating expenses prior to receivership ; nature of 
claims entitled to this preference ; six months' 
rule; extent of preference; reasons therefor; 
funds affected by the preference. 
It is well settled in this country that the claims 
for operating expenses incurred by the railroad com- 
pany before the receivership may be given a prefer- 
ence over the claims of the other creditors of the rail- 



246 RAILROAD BONDS AND NOTES 

road company, with regard to the income of the road 
and perhaps the mortgaged property itself. 

They are paid in full out of the income in the 
hands of the receiver before the bondholders under 
the foreclosed mortgage or other creditors receive 
anything. And should the income earned by the 
company have been diverted from the payment of 
current expenses to the improvement of the mort- 
gaged property, then the operating expenses are given 
the same preference with respect to the proceeds of 
the sale of the property itself, to the extent of the 
moneys so diverted. 

Generally speaking, the claims for operating ex- 
penses that come under this rule are those for services 
rendered or materials furnished to the railroad, and 
necessary for its maintenance and operation, within 
six months prior to the receivership. 

This rule has been molded b)^ the necessities of the 
complex situation that confronts the court in adjust- 
ing the affairs of the insolvent railroad company. It 
finds its justification on the grounds of equity and 
public policy. 

It is not lightly that the court will displace the lien 
of the bondholders in favor of claims for operating 
expenses, and the tendency, therefore, is to give the 
term a narrow application. Accordingly, claims for 
services in order to come under the rule are limited to 
those of operatives and employees engaged in the 
manual labor of running the road or making repairs 



PRIORITIES OF THE OTHER CREDITORS 247 

on it. A distinction is drawn against the services of 
a financial or executive officer who may be regarded 
as an employer in operating the road. Only those 
who actually do the physical work are entitled to this 
preference ; and the claims for services of those acting 
in a supervisory capacity, though employees of the 
company, are not classed as operating expenses. 

Claims for materials furnished are governed by 
substantially the same rule. To come within the 
rule, the materials furnished must have been indis- 
pensable in making repairs necessary for the mainte- 
nance and operation of the road or its equipment. 

After complying with these requirements as to the 
nature of the work or the kind of materials, it is 
necessary too that they should have been rendered or 
should have been supplied within six months prior to 
the receivership. The court may fix this period at 
more or less than six months. Its action is based 
upon the conditions that confront it. As a general 
rule six months is specified. 

The theory upon which the court works out the 
equity of the preference is that had the road con- 
tinued in operation it would have paid these operat- 
ing expenses from its earnings; but having with- 
held them, those entitled thereto may follow and 
claim them. 

Current income should be applied to current ex- 
penses. The bondholders should have received only 
the net income, what is left after these expenses are 



248 RAILROAD BONDS AND NOTES 

paid, in payment of their interest. Railroad com- 
panies usually get their labor, supplies, equipment 
and improvements on credits of varying periods, and 
when it becomes financially embarrassed these debts 
are allowed to accumulate for a period, usually, of 
about six months prior to the receivership, and the 
earnings of the road during that time, which should 
have been applied to their payment, is usually used 
to pay interest on bonds to prevent or postpone a 
foreclosure or other legal action. These earnings for 
that period should not be used for interest on bonds 
until all the current expenses of that period are paid 
in full. 

The rule, too, finds its vindication on grounds of 
public policy. The rights of bondholders under 
railroad mortgages involve considerations that are 
peculiar to that class of securities and which do not 
enter into the case of bonds secured by mortgage on 
other property. This results from the fact that a 
railroad company, though an association of private 
individuals organized for private gain, is, in its rela- 
tion to the public, a quasi public corporation. The 
public is concerned with the franchise of a railroad 
company and vitally and immediately interested that 
it shall be continued in operation. And all persons 
who become holders of railroad bonds are held to 
have accepted them and otherwise to have dealt with 
the corporation with the implied consent that should 
it fall into insolvency and its affairs be administered 



PRIORITIES OF THE OTHER CREDITORS 249 

by the courts, then those debts necessarily incurred 
for the purpose of continuing the road in operation 
and carrying out the objects for which the company 
was created, may be given priority over their own 
claims. 

This priority is limited, ordinarily, to the income 
in the hands of the receiver; but, where the income 
of the road prior to, or during, the receivership has 
been used to improve the mortgaged property, then 
claims for operating expenses are charged against the 
mortgaged property thus improved, to the extent of 
the income that was used to pay for such improve- 
ments. Under these circumstances, operating ex- 
penses to the extent of the amount that has been thus 
diverted are ordered paid out of the proceeds of the 
mortgaged property before the bondholders or other 
creditors receive anything therefrom. It must be 
shown that the income was diverted to the improve- 
ment of the mortgaged property and from the pay- 
ment of the current expenses, before such property 
itself will be charged with their payment, otherwise 
the preference in favor of operating expenses is lim- 
ited to the income. Should there be no income and 
no diversion, then claims for operating expenses 
prior to the receivership have no preference and are 
paid like general or unsecured creditors, unless they 
are otherwise secured or preferred. 

Claims against the receiver for services rendered 
or materials furnished during the receivership are 



250 RAILROAD BONDS AND NOTES 

differently considered; they are regarded as expenses 
of the receivership and, as such, are paid in full 
before the bondholders or other creditors receive any- 
thing. 

In many of the states there are statutes to the effect 
that claims for labor performed and for materials 
furnished to the railroad company necessary to con- 
struct, alter or repair the road shall be entitled to a 
lien on the property of the railroad company, so af- 
fected, and shall be entitled to a preference over any 
mortgage covering the same property given subse- 
quent to the time when the lien attached protecting 
such work or materials furnished. See Mechanics' 
liens. Page 252. 

Claims for original construction. 

Bondholders are entitled to be paid in full out of 
the proceeds of the property that has been mortgaged 
to them before the claims of those who built the road, 
either before or after their mortgage was given, re- 
ceive anything; unless the claims for such original 
construction are protected by mortgage or other lien. 
Should such claim be protected by mortgage or lien 
it then becomes a question of the priority of the re- 
spective liens. See What is meant by priority. 
Page 236. 

Experience has shown that public and private in- 
terests demand that in the building of a railroad the 
moneys for that purpose shall be fully and ade- 



PRIORITIES OF THE OTHER CREDITORS 251 

quately provided for before the commencement of 
the work. Obligated to the State to serve the public, 
the railroad company may not permit its property 
and franchise to lie dormant in disuse. It must go 
forward with the enterprise in the reasonable expec- 
tation of being able to pay the mortgage and costs of 
construction and realize to the public and to itself 
the legitimate benefits of the undertaking. If money 
be not raised by the sale of bonds, the enterprise 
would stop immediately, and the labor and materials 
already furnished would lose their greater value and 
the opportunity to earn the money to pay for them 
would also go. If the bondholders do. not advance 
their money at this critical time, all that had been 
done would greatly diminish in value if not be lost. 

And the efforts that have been made to obtain for 
the claims for original construction of the road a 
preference, because they furnished by their labor and 
materials the very property which is mortgaged to 
the bondholders, finds no foundation. 

Those supplying the materials and labor for the 
original construction of the road might protect them- 
selves by a mortgage : but the presence of a mortgage 
to secure the claims for original construction would 
interfere with later and necessary financing. And 
it seems no hardship that the claims for original con- 
struction of the mortgaged property should be paid 
out of that property after the claims of the bond- 
holders secured by mortgage on it, as it is the money 



252 RAILROAD BONDS AND NOTES 

the latter supply that makes the labor and materials 
of the former productive and of practical value. 

In some of the States, however, there are statutes 
that give contractors and those supplying materials 
and labor for the original construction of a railroad 
a preference in payment out of the assets of the corpo- 
ration over a mortgage upon the road executed later. 

Sometimes the claims for original construction of 
the road, or for permanent repairs, may take the form 
of claims for operating expenses and, as such, receive 
a preference. See Operating expenses. Page 245. 

Mechanics' liens. 

As a rule, mechanics' liens do not affect railroad 
property unless the statute giving the lien specifically 
declares that it shall include railroad property. 

A lien is sometimes given by statute to those who 
furnish materials or render labor in the constructing, 
repairing or altering of the property of a railroad. 
These statutes declare that within a limited time, 
usually ninety days, after the last item of work has 
been done or piece of material has been furnished, a 
written statement of the claim must be filed in the 
office of the public officer designated, usually the 
clerk of the county where the property is situated 
upon which the lien is claimed. 

From the time this statement is filed the lien at- 
taches to the property that was benefited by the labor 
or materials, and such lien takes priority over any 



PRIORITIES OF THE OTHER CREDITORS 253 

mortgage or other lien subsequently attaching to the 
property. However, as was stated, a mechanics' lien 
does not apply to the property of a railroad unless 
the statute which gives the lien says that it shall. 

Attachments and executions against property of 
the road. 

As a railroad is charged with its duty to the public 
to continue in operation, an attachment or execution 
may not be levied against such of its property, or 
under such conditions as will interfere with the per- 
formance of such public duties; a receiver will then 
be appointed. An attachment or execution, how- 
ever, may be levied against the property of a rail- 
road where it does not interfere with its operation. 
See Judgments. Page 258. 

An attachment against property is the legal process 
whereby property of a party to the suit, at the in- 
stance of the opposing party, is taken during the 
progress of civil litigation, and is held to await the 
final determination of the rights of the parties. 
Should the party at whose instance such property was 
seized be successful in such suit, he may then take 
such property so attached and apply it to the pay- 
ment of the judgment he has obtained. It is a means 
of seizing property, at the commencement of litiga- 
tion, to insure payment of a judgment and also so 
that its owner cannot remove or dispose of it, and 
thus defeat subsequent proceedings against it. 



254 RAILROAD BONDS AND NOTES 

Should the party at whose instance such property 
was attached be defeated in the final outcome of 
the suit he must pay the owner of such property 
damages for its wrongful seizure and detention. 

An execution against property is the final process 
in a civil suit whereby the property of the defeated 
party is taken by the officer designated by law for 
that purpose, usually the sheriff, to satisfy the judg- 
ment that has been rendered in favor of the successful 
party. 

Preferred stock. 

The claims of bondholders under a mortgage are 
prior, ordinarily, to those of the holders of preferred 
stock, for both principal and interest. However, 
preferred stock may be issued under an agreement 
that the dividends payable on it shall be a charge 
against the property of the road, prior to all indebt- 
ednesses subsequently created. In such a case, a 
mortgage executed by the railroad company, after 
such an agreement is of record, is subordinate or 
junior to the claims for such dividends so secured. 

Taxes, public assessments, governmental charges. 

The lien of the bondholders under their mortgage 
and the claims of all other creditors are, as a general 
rule, deferred to the indebtednesses of the corpora- 
tion for unpaid taxes, public assessments, or other 
governmental charges. Money due for the pur- 



PRIORITIES OF THE OTHER CREDITORS 255 

poses mentioned are declared by statute to be liens 
upon the property of the person or corporation owing 
it. The superior standing of indebtednesses of this 
character is always recognized by the courts and 
they are paid in full, no matter when they accrued, 
before any other creditors receive anything. 

The lien for claims of the kind under discussion 
do not displace the lien of the mortgage of the bond- 
holders, unless the statute imposing such tax, or 
other enactment, declares it shall; these statutes 
invariably declare, however, that the liens for charges 
of the nature mentioned shall be superior to all other 
liens against the property. 

Purchase money mortgages; conditional sales. 

The mortgage that the railroad company may 
execute to secure the unpaid balance of the purchase 
price of property that it may acquire, is superior to 
any mortgage or other lien that the railroad company 
may execute or create, or may have executed or cre- 
ated against such property, either before or after such 
purchase money mortgage was given. 

Therefore, property falling under the lien of a 
mortgage already existing against the road with the 
after acquired property clause, must first satisfy in 
full a purchase money mortgage before its proceeds 
shall be applied to the satisfaction of the claims 
under such mortgage with the after acquired prop- 
erty clause. 



256 RAILROAD BONDS AND NOTES 

The theory of law upon which this conclusion is 
reached is that the railroad company never was pos- 
sessed of that portion of the property covered by the 
purchase money mortgage; and the railroad company 
gets this property subject to such purchase money 
mortgage ; it has attached to the property before the 
railroad company got it, and whatever it may have 
done or may do in the future is subject to such pur- 
chase money mortgage. 

A similar result is produced by the arrangement 
known as the "conditional sale." 

Property may be sold to the railroad company with 
the condition that the party selling it shall retain 
the title and ownership until the purchase price has 
been paid in full, but that the railroad company may, 
in the meantime, have possession and use of the 
property. This is a conditional sale in which the 
passing of title and ownership are conditional upon 
the payment of the full purchase price. 

As the corporation can mortgage only those inter- 
ests in property that it has, its mortgage does not 
include such property purchased on conditional sales, 
as it has no interest in that property, such as can be 
the subject of a mortgage, until it has paid the pur- 
chase price in full and acquires title. Should there 
be an after acquired property clause in the mortgage, 
it covers such property only when the railroad ulti- 
mately acquires the title to it. See Car trust certifi- 
cates or bonds. Page 316. 



PRIORITIES OF THE OTHER CREDITORS 257 

The difference between the two instances is that in 
the purchase money mortgage the railroad company 
acquires the title and ownership of the property im- 
mediately, subject to the superior lien of the pur- 
chase money mortgage ; while in the conditional sale 
the title and ownership to the property continues in 
the seller until the full purchase price is paid, though 
the railroad company may have possession and use 
of it in the meanwhile. 

Right of way claims. 

Land may be taken from owners against their wills 
for public purposes. As railroads are regarded as 
quasi public corporations, land may be taken thus 
for rights of way for railroads. 

The right to take land under these circumstances 
lies in the State by reason of its sovereign power. 
This is called the "right of eminent domain." The 
value of the land so taken is appraised and such sum 
paid to the owner. He and his experts have an op- 
portunity to be heard. The proceedings under 
which the land is thus taken, and its value fixed and 
paid, are called "condemnation proceedings." 

Owners of adjacent land which has been harm- 
fully affected by the road running near it, though 
such land has not been actually taken, are entitled 
to damages to the amount that the property has been 
diminished in value. 

When a railroad includes a right of way in its 



258 RAILROAD BONDS AND NOTES 

mortgage there may be a conflict as to priority be- 
tween bondholders under that mortgage and those 
from whom the right of way was acquired. 

Those from whom land for rights of way was ac- 
quired under these proceedings are entitled to a pref- 
erence for the unpaid price, or any portion of it, over 
all mortgages of the railroad company. Claims for 
damages to adjoining owners against the railroad 
company arising out of the obtaining by it of a right 
of way, though their property was not actually taken, 
are given a like preference. 

However, should the right of way be purchased 
with money that is loaned to the railroad company, 
the party loaning the money for that purpose is not 
entitled to any preference. His relation is that of 
one who has loaned money to the company and not 
that of one from whom the right of way was ac- 
quired. 

Judgments. 

The claims of the bondholders under their mort- 
gage are entitled to payment in full out of the mort- 
gaged property before judgments against the road 
receive anything from that property, where the judg- 
ments were recovered and docketed after the mort- 
gage was recorded or filed. If the judgment was 
docketed before the mortgage was recorded, then it is 
entitled to be paid in full out of the property of the 
road, including the mortgaged property, before the 



PRIORITIES OF THE OTHER CREDITORS 259 

bondholders receive anything from the property cov- 
ered by their mortgage. 

Whether the mortgage or the judgment has pri- 
ority in payment out of the proceeds of certain prop- 
erty depends upon which was made a public record 
first, by filing or recording in the case of the mort- 
gage, or docketing in the case of the judgment. 

The docketing of a judgment in the office of the 
public official designated therefor, usually the clerk 
of the county wherein the judgment was obtained, 
makes that judgment a lien against the real estate 
of the railroad company situated within that county. 
Transcripts of the judgment may be docketed in each 
county in which the railroad company has property, 
and thus become liens against its property in each of 
such counties. 

Both the docketed judgment and the filed or re- 
corded mortgage create liens against the real estate 
of the railroad company. The lien of the judgment 
attaches to all the real estate of the corporation situ- 
ated in the counties in which the judgment is dock- 
eted; while the lien of the mortgage attaches only 
to the property that is pledged by the mortgage. 
See Attachments and Executions. Page 253. 

Claims and judgments growing out of injuries 
caused persons or property while the receiver oper- 
ated the road are regarded as expenses of the receiv- 
ership and therefore are paid in full before the claims 
under any mortgage receive anything. 



26o RAILROAD BONDS AND NOTES 

Claims and judgments for injuries to persons or 
property. 

All claims for damages arising out of the trans- 
portation of persons or property while the railroad 
company operated the road are, as a general rule, 
classed as general or unsecured debts of the road. 

In a few States judgments for damages to per- 
sons or property sustained while the railroad com- 
pany operated the road, constitute a lien on all its 
property, from the time the injury was inflicted, and 
are entitled to be paid in full out of such property, 
including that covered by mortgages, before the 
bondholders under such mortgages receive anything. 
In the absence of such a statute law this right to a 
preference does not exist. 

Claims or judgments against the receiver, how- 
ever, for injuries or damages to persons or property 
during the operation of the road by him stand upon 
a different footing and are paid as expenses of the 
receivership, and are paid therefore in full before the 
bondholders under their mortgage receive anything. 

Priorities among interest coupons and claims for 
interest; between principal and interest. 

Interest coupons or claims for interest are, ordi- 
narily, not entitled to priority over the principal of 
the bonds. Nor are interest coupons or claims for 
interest, as among themselves, entitled to any pref- 
erence because one matures before the other. How- 



PRIORITIES OF THE OTHER CREDITORS 261 

ever, overdue coupons have been given a preference 
over their bonds which have not matured, when a 
part of the series of coupons to which they belong 
had already been paid. 

Railroad mortgages usually provide that all in- 
terest coupons and claims for interest shall, under 
all circumstances, share equally in the proceeds of 
the mortgaged property; and that when the princi- 
pal of the bonds becomes due (for any reason) that 
the coupons and the claims for interest and the 
claims for the principal of the bonds shall all stand 
on the same footing and be paid without preference 
of one over the other. However, railroad mort- 
gages may properly make provision for a priority 
among the coupons and principal and, as is some- 
times the case, declare that coupons shall be entitled 
to a priority according to the dates of their maturi- 
ties. Sometimes a railroad mortgage will contain 
a provision that the coupons shall be paid before the 
principal of the bond. Such arrangements or any 
other that the parties shall agree upon will be car- 
ried out by the court. 

The usual form of railroad mortgage contains the 
stipulation that when the coupons are paid they shall 
be canceled. This is done because a third party may 
have advanced the money to the railroad company 
with which to pay the coupons and may then hold 
them against the railroad company as its unpaid 
outstanding obligations. To permit such third party 



262 RAILROAD BONDS AND NOTES 

to keep alive these coupons would enable him to 
prove them in competition with the holders of the 
bonds and of the other coupons under the mortgage 
and to share with them in the security, and thereby 
lessen their respective shares in the proceeds of the 
mortgaged property. Hence this provision that 
when paid, the coupons shall be canceled so far as 
the holders of the bonds and other coupons are con- 
cerned. But as between the railroad company and 
the party paying off such coupons in its behalf, the 
coupons may be kept alive as evidence of the debt 
the railroad company owes such third party for the 
money so advanced. See Effect of payment on cou- 
pons. Page 38. 

Notes; debentures or unsecured bonds. 

When a railroad company has the power to issue 
written obligations for the payment of its debts, the 
particular form such obligation shall take is a mat- 
ter that the corporation itself may regulate. It may 
issue bonds or notes, and may or may not secure them 
by mortgage or otherwise. 

A note is the written promise of the railroad com- 
pany to pay a certain principal sum with the date of 
payment, rate of interest, and the times for the pay- 
ment of the interest specified in the note. The notes 
may be in coupon form and may have coupons at- 
tached, the same as bonds have, for the different 
instalments of interest. The same rules in all re- 



PRIORITIES OF THE OTHER CREDITORS 263 

spects apply to the principal and coupons of notes 
that apply to the principal and coupons of bonds. 

There is no difference between a note and a bond 
in their respective natures, as each is the written 
promise of the issuing company to pay according to 
the tenor of their respective terms; nor is there any 
difference between the coupons of each, in their re- 
spective natures. See Notes and bonds compared. 
Page 11. 

Notes of a railroad company may be secured by 
a mortgage on its property, or they may be other- 
wise secured. The same rules apply to the mort- 
gages or other security for notes as apply to mort- 
gages or other security for bonds under like condi- 
tions. It seems the custom, however, to issue notes, 
without security of any kind other than the credit 
and standing of the issuing company, and its general 
ownership of property, without creating any specific 
lien thereon in favor of the notes. 

Notes are usually issued for shorter periods than 
bonds. When they are issued for longer periods and 
are not secured they are referred to as debentures. 

In the United States, the term ''debenture" is 
generally used to designate a bond that is unsecured 
by mortgage or any collateral. It is a plain bond 
containing a promise by the railroad company that 
issues it to pay a specified sum with interest, at a 
certain date. 

The term as used in the United States should not 



264 RAILROAD BONDS AND NOTES 

be confused with the meaning given to it in other 
countries/ In the United States a debenture is 
generally understood to mean an unsecured bond. 

The holder of an unsecured note or an unsecured 
debenture of a railroad company stands upon the 
same footing as any other general or unsecured cred- 
itor of the corporation. He shares proportionately 
with all other general or unsecured creditors in the 
property upon which there is no mortgage or other 
lien. He has no recourse to any property of the 
railroad company that is covered by a mortgage or 
other lien, until all the claims represented by such 
mortgages or other liens have been satisfied in full 
out of such property. He then shares proportion- 
ately in what remains of such property after such 
mortgages or other liens have been satisfied in full. 

Should the bondholders or other creditors secured 
by mortgages or other liens against specific pieces of 
property find that after such property has been real- 
ized upon there is a deficit, then for such balance of 
their claims remaining unpaid, they become general 
or unsecured creditors and, as such, are entitled to 
share proportionately with the unsecured debenture 
holders and unsecured noteholders and all other un- 
secured creditors in such funds as the latter class of 
creditors have access to. See Secured and unsecured 
creditors. Page 227. See also Difference between 
bondholders and stockholders. Page 15. 

1 See footnote, pages 11 and 12. 



PRIORITIES OF THE OTHER CREDITORS 265 

Debenture holders and unsecured noteholders are 
entitled to be paid in full before the stockholders 
receive anything. 

In many issues of debenture bonds and of notes 
that are unsecured, the railroad company stipulates 
that it will create no mortgage or other lien on its 
property to secure any subsequent issue of bonds or 
other securities that will give such subsequent issue 
priority over or equality with the holders of such 
debentures or notes. Sometimes the provision is 
that, should a mortgage be subsequently given to 
secure a later issue of securities, the holders of such 
notes or debentures shall share in the security such 
mortgage gives equally with the holders of the se- 
curities issued under it. 

The standing of the debentures and of the notes 
and of the property of the road is not disturbed but 
is thus kept as it was when such notes or debentures 
were issued; in this way the debentures or notes are 
not subsequently mortgaged out of the equity in 
the property of the railroad company that they had 
at the time they were issued. 

As was said, debentures and notes are usually put 
out for shorter periods than secured bonds ; they are 
also usually put out for smaller amounts than the 
usual issue of secured bonds, thus saving the expense 
and trouble of mortgaging the property of the road 
for temporary purposes. They are usually taken 
up by later issues of refunding or general mortgages 



266 RAILROAD BONDS AND NOTES 

bonds. See Unification; general mortgage bonds; 
blanket mortgage bonds. Page 269. See also Re- 
funding mortgage bonds. Page 272. 

First lien bonds. 

First lien bonds are secured by a lien upon the 
mortgaged property that is prior to all other mort- 
gages or other liens. They are secured by a mort- 
gage that is a first lien upon the property it covers. 

First lien bonds are satisfied out of the property 
covered by their mortgage, in full, before any other 
claimant is paid; except such debts as are preferred 
by the statutes of the States, such as claims for taxes 
and other governmental charges ; and also such debts 
that the court gives a preference to, such as claims 
for operating expenses and receivers' certificates. 

To be first lien bonds they must be secured by a 
mortgage that is a first lien on the property it covers ; 
there must be no prior mortgage or other prior lien, 
created by the railroad company or by a constituent 
company before consolidation, against the property 
pledged by such prior lien mortgage. 

A mortgage that is strictly a first lien mortgage 
usually contains a representation and promise by 
the railroad company issuing it that the property it 
pledges is subject to no mortgage or other lien and 
that it, the railroad company, will not create or suffer 
to be created any lien that shall have priority over 
or equality with the lien of that mortgage ; and with 



PRIORITIES OF THE OTHER CREDITORS 267 

respect to such liens as may be given a preference, 
that it will discharge or adequately provide for them. 
Attention may be here called to the fact that an 
issue of bonds may be termed "first lien" bonds be- 
cause it is secured by a first lien on part of the prop- 
erty that the mortgage covers, though it may be an 
inferior and junior lien on the other parts. 

First mortgage bonds ; first mortgage trust bonds ; 
first mortgage consolidated bonds; second, 
third, etc., mortgage bonds. 

The term ''first mortgage" bonds, as used in mod- 
ern finance, may not mean that they are secured by 
a mortgage that is a first lien on all the property 
covered by the mortgage ; it may not be a lien on the 
physical property of the issuing company at all. 

The so called first mortgage may be a first mort- 
gage or a first lien only on a division of the mort- 
gaged road or only on a portion of the property it 
covers, and as to the other divisions or property it 
covers, it may be a lien later, inferior, and junior 
to other mortgages or other liens existing against it. 

Sometimes a mortgage is called ''first" when it is 
not a lien on the road or the physical property of 
the issuing company, but because such mortgage cov- 
ers bonds or other securities issued by another rail- 
road company and deposited with the trustee, which 
deposited securities are secured by a first mortgage 
of some kind on the property of that other railroad 



268 RAILROAD BONDS AND NOTES 

company. When there is a default under the mort- 
gage securing the deposited bonds, the trustee pro- 
ceeds to foreclose that mortgage and to realize on 
the securities that have been deposited. And it is 
the duty of the trustee to keep under observation 
the company that issued the deposited securities. 

Bonds secured by securities deposited in trust, 
and which deposited securities are secured by a first 
mortgage on the property of the company that issued 
them, are usually called "first mortgage trust" bonds. 
See Collateral Trust Bonds, Page 277. 

In a further attempt at analysis, the first mort- 
gage consolidated bonds may be fruitful. The term 
"first mortgage consolidated" bonds may be taken to 
mean an issue, that while they may be secured by a 
first mortgage upon all the property owned in the 
name of the consolidated company that issued them, 
they are nevertheless subject to such prior mortgages 
or other liens as the constituent companies, that 
formed the consolidated company, may have placed 
against such property before the consolidation or 
merger. When mortgage bonds are issued by a con- 
solidated company it is notice to the intending bond- 
holder that they may be secured by a mortgage upon 
property that may have been derived from two or 
more constituent companies, and that they are there- 
fore subject to whatever mortgages or other liens 
that may have been placed on it prior to the con- 
solidation or merger. 



PRIORITIES OF THE OTHER CREDITORS 269 

Second mortgages, or third mortgages, or mort- 
gages other than first, are rarely used. When they 
are used they are entitled to priority in payment out 
of the property against which they are successive 
liens, in the order in which they attached to such 
property. See Successive mortgages or other liens. 
Page 238. It seems to be the custom when putting 
out an issue after a mortgage already exists against 
the property of the road, to make such later issue 
for a larger sum than is then needed and to secure 
it by a general mortgage or blanket mortgage, cover- 
ing all the property of the issuing company, and 
with part of the proceeds to refund or to take up the 
bonds under such prior mortgages already existing. 
In this way the bonds of the later issue acquire in 
time the standing, rank or priority that such first or 
underlying issue, which is retired, had. See Unifica- 
tion; general mortgage bonds; blanket mortgage 
bonds. Page 269. See also Refunding mortgage 
bonds. Page 272. 

Unification; general mortgage bonds; blanket 
mortgage bonds. 

General mortgage bonds or blanket mortgage 
bonds are secured by a mortgage on all the property 
of the issuing company. They invariably follow 
some mortgage already on the property. 

The general mortgage or blanket mortgage is sub- 
ject, junior and inferior to all the mortgages or 



270 RAILROAD BONDS AND NOTES 

other liens existing against the property mortgaged 
at the time it is executed. 

There is a technical difference between a blanket 
mortgage and a general mortgage. It is that the 
blanket mortgage, properly named, covers several 
groups or systems of the road, each of which may 
have no relation to the other in its use; while a gen- 
eral mortgage, properly named, covers one road or a 
number of branches or divisions of the road, but all 
relating to each other in their use. This distinction 
is rarely observed, and the terms "blanket mortgage" 
and "general mortgage" are used interchangeably. 
Issues of the character of general or blanket mort- 
gages are sometimes classified as unified bonds, as 
by their use the bonded indebtedness of the road is 
unified; thus simplifying its handling. 

The general or blanket mortgage is usually for 
an amount large enough to meet the present require- 
ments and future needs of the road, and also to 
refund or retire all or part of the bonds secured by 
prior or underlying mortgages or other liens. And 
as the paying off or retiring of the bonds of the 
underlying or prior mortgage progresses, the lien of 
the blanket or general mortgage advances, and when 
all the bonds of the prior or underlying mortgages 
are disposed of, the general or blanket mortgage 
then occupies the place that the mortgage so paid 
off enjoyed, which is usually a first lien upon the 
property it covers. 



PRIORITIES OF THE OTHER CREDITORS 271 

The blanket or general mortgage usually provides 
for putting out the issue in series or portions. The 
entire amount of the issue that has been authorized 
is not put out at once. A certain proportion is put 
out at the time of the execution of the mortgage; 
the next instalment is put out at a fixed time or upon 
the happening of a certain event or contingency; 
or instalments in fixed amounts may be put out when 
the railroad company, in its judgment, believes it 
necessary; or the different series or instalments may 
be put out when and in such amounts as the mort- 
gage may provide. See Refunding mortgage bonds. 
Page 272. 

No matter when put out all the bonds of the gen- 
eral or blanket mortgage are entitled to the same 
protection of their mortgage, in the absence of any- 
thing to the contrary contained in the mortgage. 
And all bonds under such an issue are entitled to 
priority over bonds or other securities secured by 
later mortgages, notwithstanding that the bonds un- 
der the general or blanket mortgage may have been 
put out after .the later mortgage was executed. See 
New mortgage before atl bonds or notes under prior 
mortgage are put out. Page 245. 

Underlying liens. 

An underlying lien usually represents the original 
mortgage placed upon the property. 

When a consolidated company issues its consoli- 



272 RAILROAD BONDS AND NOTES 

dated mortgage, it is subject to the liens of those 
underlying mortgages that were placed upon the 
property by the constituent companies before con- 
solidation. See Bonds of consolidated railroads; 
bonds of constituent roads. Page 286. See Divi- 
sional bonds. Page 292. 

Underlying liens precede and have priority over 
every later issue and are paid in full before such 
later mortgages or other liens receive anything 
out of that property. Underlying liens are usually 
followed, in time, by a refunding mortgage, or by 
a blanket or general mortgage with refunding fea- 
tures. Part of the money raised by these later is- 
sues is used for the purpose of retiring the bonds 
secured by the underlying liens. 

In refunding plans, the underlying issues are re- 
tired by being paid for with the proceeds of the 
sale of the new bonds, or by exchanging them for 
the new bonds themselves; and when all the bonds 
secured by the underlying liens have been retired, 
their mortgage is canceled and the new refunding 
mortgage succeeds to its place as a lien. 

Refunding mortgage bonds. 

Refunding mortgage bonds are those intended to 
retire with their proceeds, or part thereof, or by ex- 
changing, certain other bonds secured by prior or 
underlying mortgages or other liens against the same 
property. 



PRIORITIES OF THE OTHER CREDITORS 273 

At the time it is executed the lien of the mortgage 
that secures the refunding issue is, of course, inferior 
and junior to that of the mortgage that secures the 
underlying bonds; but as the refunding progresses, 
the lien of the refunding mortgage advances, and 
when all the bonds to be refunded have been dis- 
posed of, it succeeds, in effect, to the standing, 
priority and legal rank that the mortgage that se- 
cured the retired bonds enjoyed. 

The refunding mortgage is usually for an amount 
that will retire the underlying liens, and that will 
also meet the present requirements of the issuing 
company and its future needs. 

The mortgage contains the plan by which the 
prior issue shall be refunded. 

The usual refunding plan is that all the bonds 
of the new issue shall be turned over to the trustee 
under the terms of the refunding mortgage ; the trus- 
tee sells these new bonds and with the proceeds buys 
up the bonds secured by the underlying liens; or 
he exchanges the new bonds for them. In this way, 
when all the outstanding bonds secured by the un- 
derlying liens are taken up, by purchase or exchange, 
their mortgage is discharged of record and the mort- 
gage securing the refunding issue takes its place. 

During the time that the refunding goes on, the 
trustee, as he buys in or exchanges the old bonds, 
holds them uncanceled and in trust for his bond- 
holders, so that, should there be a default under 



274 RAILROAD BONDS AND NOTES 

the terms of the underlying mortgage, he will be in 
a position to enforce these old bonds under their 
underlying mortgage for the benefit of his bondhold- 
ers of the new issue. 

It should be noted that the lien of the mortgage 
securing the new issue succeeds to the lien of the 
mortgage of the old issue when the latter is dis- 
charged of record, provided that between the time 
when the old mortgage was recorded and the time 
when the refunding mortgage was recorded, no other 
lien attached to the property. Should a lien have 
attached in the meantime, it will take priority over 
the new refunding mortgage. But this is a matter 
of form only, because the trustee by holding the 
bonds of the old mortgage, uncanceled, is in a posi- 
tion to enforce them under the lien of the old mort- 
gage and prior to the lien that may have come be- 
tween, should it be necessary. The old mortgage 
will not be discharged should there be any inter- 
vening liens until they have been disposed of. 

Bonds resulting from consolidation, merger, lease 
or control of property or stock of subsidiary 
companies. 

The rapid growth of our country has brought 
about railroad consolidation. Under the old meth- 
ods when railroad traffic requirements were small 
compared to those of to-day, small lines were oper- 
ated successfully. They carried passengers and 



PRIORITIES OF THE OTHER CREDITORS 275 

freight between termini which were comparatively 
short distances apart. In time arrangements with 
connecting lines to act practically as extensions be- 
came necessary. These connecting or extending 
lines constituted in this way commercially, though 
not in the strict legal sense, one system. Each com- 
pany was a distinct corporation; traffic contracts 
bound them commercially together. 

The legislatures of the States through which these 
roads ran recognized the advantage and necessity of 
uniting the control of railroads under such condi- 
tions as existed, and enacted laws authorizing the 
consolidation of connecting or continuous lines. 
Then, as now, these statutes forbade consolidation 
of competing or parallel roads, thus preventing com- 
binations between rival lines that would stifle healthy 
competition. There must be express authority for 
the consolidation, either by a general statute law or 
a special charter provision. 

And so, in this way, systems of railroads were 
formed and later, by the consolidation or merger of 
these systems, the gigantic enterprises of to-day were 
brought about. And where consolidation or merger 
was not permitted, or was not feasible for any rea- 
son, the control of branch lines and of other rail- 
roads was acquired by the parent company of a great 
system owning the property or a controlling inter- 
est in the capital stock of such subsidiary company; 
or by lease of it; or by the personal element of the 



276 RAILROAD BONDS AND NOTES 

same or friendly management; and in some instances 
through the means of the holding company. 

The legislature of each State has the power to 
enact laws that will affect the persons and property 
only within its own geographical territory. The leg- 
islature of one State has no power to create a cor- 
poration in another State. The legislatures of two 
or more States cannot combine to form a corporation. 
The legislature of one State, however, may author- 
ize a railroad organized under its laws to consoli- 
date with one of another State. Should there be no 
authority for the consolidation or merger the same 
end is usually attained by the same persons acting as 
officers and the same directorate managing all the 
roads; or through the ownership of the property or 
controlling interest in or controlling voting power 
of the capital stock in one corporation by the other. 
Their affairs are then consolidated though the cor- 
porations are not. These different corporations in 
the different States may all use the same name; but 
each exists as a separate corporation. By any of 
these methods the policies of two or more railroads 
may be kept in harmony and serve each other's 
needs ; and a system is thus formed. 

The plan for controlling a railroad through the 
ownership of a controlling interest in its capital stock 
has developed the holding company. This is a sep- 
arate corporation whose only purpose seems to be 
to hold controlling amounts or interests in the cap- 



PRIORITIES OF THE OTHER CREDITORS 277 

ital stocks of the various companies that form the 
system. It does not operate any road; but it man- 
ages all of them. It has a controlling vote in each 
corporation of the system, therefore, elects their re- 
spective boards of directors, decides the policies of 
each and by this consolidation of power, controls 
and is absolute master of the entire system. These 
holding companies are not favored in law when they 
tend to stifle competition. Recent legislation has 
been directed against them. 

From the financing of these enterprises and the 
consolidation, merger, lease or control of the differ- 
ent railroads, there have resulted securities such as 
collateral trust bonds, consolidated bonds, underly- 
ing bonds of constituent companies, divisional bonds, 
guaranteed bonds, bonds of leased lines, assumed 
bonds, endorsed bonds, stamped bonds, terminal 
bonds, etc. To a consideration of the rights and 
remedies under these various forms of securities and 
their respective priorities, the following pages are 
directed. 

Collateral trast bonds; collateral trust notes; con- 
vertible collateral trust bonds or notes ; partici- 
pating or profit sharing bonds ; three methods 
of issuing collateral trust bonds. 

Collateral trust bonds or notes are those secured 
by a mortgage under which the issuing company 
pledges securities belonging to it, such as stocks and 



278 RAILROAD BONDS AND NOTES 

bonds, from its own treasury, or the securities issued 
by some subsidiary company that it controls. The 
physical property of its road is not mortgaged. 

Collateral trust bonds or notes are usually issued 
by the parent company of a system depositing with 
the trustee under its mortgage the stocks or bonds, 
or both, of the minor or subsidiary road or roads it 
controls. 

Under the collateral trust mortgage the securities 
that are pledged are deposited with the trustee. 

When the deposit consists of different kinds of 
securities, such as railroad bonds, municipal bonds, 
stocks, etc., it is called "mixed collateral." 

Should first mortgage bonds be deposited the is- 
sue is sometimes called "first mortgage collateral 
trust bonds." See First mortgage bonds; first mort- 
gage trust bonds. Page 267. 

Notes secured by a collateral trust mortgage are 
sometimes referred to as "mortgage trust notes," be- 
sides the more common designation of collateral trust 
notes. 

Collateral trust mortgages may provide that the 
securities deposited with the trustee may be with' 
drawn, from time to time, by the railroad company 
issuing the mortgage, and others substituted in their 
stead. Such substitution can be made only on the 
consent of the trustee and under his supervision. 

The power is sometimes conferred on the trustee 
by the mortgage to demand that the railroad com- 



PRIORITIES OF THE OTHER CREDITORS 279 

pany shall substitute new securities for such as, in 
his opinion, shall have diminished in value and are 
no longer an adequate security. The railroad com- 
pany must comply with such demand within the 
time limited in the mortgage, and a failure to do so 
will be a default. 

Where the mortgage provides for the substitution, 
converting, or changing of the securities, the issue 
is usually called ''convertible collateral trust bonds." 

The income from the pledged securities is also pro- 
vided for in the mortgage. Usually the trustee re- 
ceives it and pays the interest on the collateral trust 
bonds and with the surplus, if any, he maintains a 
sinking fund. The terms of the issue may be that 
the railroad company making the issue shall pay the 
interest on the collateral trust bonds directly, and 
accordingly shall receive the dividends and interest 
on the deposited securities. 

The rate of interest payable on collateral trust 
bonds is usually at a fixed rate; however, it may be 
arranged in the mortgage that the rate of interest, 
while specified at a certain percentum, may be in- 
creased. 

A provision of this kind is usually to the effect 
that should the deposited stock pay a dividend or 
dividends beyond a certain amount, the rate of in- 
terest on the collateral trust bonds shall be increased 
proportionately. When the mortgage contains such 
arrangement, the issue is known as collateral trust 



28o RAILROAD BONDS AND NOTES 

bonds with the participating or profit sharing fea- 
ture. This feature, however, is rarely employed. 

Collateral trust bonds are usually issued for 
shorter periods than the usual form of railroad bonds, 
as they are issued at times when the interest rate is 
unfavorable to the road, or at a time when the con- 
dition of the market or of the credit of the issuing 
company may adversely influence their price. It is 
therefore to avoid the encumbering of the property 
of the road with a mortgage to secure an issue of 
bonds for a long period, put out at a higher rate of 
interest and at a lower price than would probably 
prevail in the near future, that collateral trust bonds 
or notes are sometimes issued. When conditions are 
more favorable an issue with a refunding feature 
may be put out and the collateral trust bonds or 
notes taken up. 

Accordingly, the railroad company in issuing the 
collateral trust bonds or notes usually reserves the 
right to pay them off, in full or in part, before ma- 
turity. This, together with the privilege of con- 
verting or changing the deposited securities, gives 
the railroad company an opportunity to take ad- 
vantage of the market and to dispose of any or all 
of the deposited securities that may be selling at a 
good price and with the proceeds pay off the col- 
lateral trust bonds which are usually issued at a 
higher rate of interest than other mortgage bonds. 

The mortgage securing the collateral trust bonds 



PRIORITIES OF THE OTHER CREDITORS 281 

usually provides that the issuing railroad company 
shall not place upon the property of the subsidiary 
company, whose stocks and bonds are deposited un- 
der the mortgage, nor suffer to be placed thereon, 
any mortgage or other lien that will interfere with 
or prejudice, in any way, the rights and remedies 
of the holders of the collateral trust bonds. 

The collateral trust mortgage creates no lien on 
the tangible property constituting the "road" of the 
issuing company, such as its real estate, rolling stock, 
and other property of kindred nature. In this it 
differs from the usual railroad mortgage which does 
create a direct lien on the tangible property of the 
issuing railroad company mentioned in the mort- 
gage. 

The collateral trust mortgage creates only an in- 
direct lien on the property of the company whose 
securities are deposited, in that the lien of the col- 
lateral trust mortgage is upon the deposited securi- 
ties only, though they, in turn, under their mortgage, 
are a direct lien (if mortgage bonds be deposited) 
upon the tangible property of the railroad company 
that issued them. 

In order to realize on the collateral trust mortgage, 
its trustee, upon default of the issuing company, 
forecloses his mortgage against the deposited stocks 
and bonds or otherwise realizes upon them under 
any other remedies that the mortgage may give him, 
among them, selling them in the market. 



282 RAILROAD BONDS AND NOTES 

The foreclosure of a collateral trust mortgage is 
more involved than that of the ordinary mortgage. 
The decree of foreclosure covers only the stocks and 
bonds pledged, and they pass to the trustee, under 
the decree, to be realized upon by him. He may 
sell them, if the court believes this advisable; or 
the court may declare that the trustee shall be re- 
garded as the holder of such stocks and bonds and 
shall proceed against the property of the subsidiary 
company that issued such deposited securities, upon 
its default under its mortgage. The affairs of the 
subsidiary company and those of the parent company 
are usually so interlocked that the insolvency of the 
latter affects the former, and where the parent com- 
pany is in difficulties and has defaulted, it will be 
found invariably that a like condition exists with 
regard to the subsidiary company. 

And when the parent company has defaulted on 
its collateral trust bonds, the subsidiary company 
will be found to have defaulted on its securities that 
have been deposited. The trustee is then in a posi- 
tion to proceed against such deposited securities and 
in that way get at the physical property that was 
mortgaged to secure the deposited bonds of the 
subsidiary company; and where its stock has been 
deposited, to realize on the rights in its property, 
mortgaged or unencumbered, that such stock repre- 
sents. To avoid the expense and delay that attends 
these separate foreclosures, the trustee is usually em- 



PRIORITIES OF THE OTHER CREDITORS 283 

powered by the mortgage to enter into possession of 
the property that was mortgaged to secure the de- 
posited bonds and sell the same. 

While railroad companies may issue collateral 
trust bonds or notes and secure them by a mortgage 
against stocks and bonds which it deposits with the 
trustee, taking such stocks and bonds from its own 
treasury, this form of bond and mortgage is more 
commonly used to raise money to build an extension 
or branch line which is or will become a subsidiary 
company. 

The new division, extension, or branch line, by 
whatever name it may be referred to, is always in- 
corporated as a separate and distinct legal body. 

There are three methods of financing employed 
when raising funds for the subsidiary company, in 
which the collateral trust bond and mortgage is 
used. 

(1) The parent company may supply the neces- 
sary money to the subsidiary com.pany for the con- 
struction of the extension or branch, by buying its 
capital stock and its bonds which it issues, or a con- 
trolling interest in them. The parent company then 
reimburses itself by selling its own issue of collateral 
trust bonds, its own direct obligation, securing them 
by depositing the stocks and bonds of the newly in- 
corporated branch line, which it has purchased. In 
this case the parent company pays cash for the stock 
and bonds of the subsidiary company and then reim- 



284 RAILROAD ZIDNDS AND NOTES 

burses itself by the sale of its own collateral trust 
bonds. This method means the withdrawal from 
the treasury of the parent company of a large sum of 
money which may embarrass, even though tempora- 
rily, its own affairs. 

(2) Plans whereby the actual outlay of money 
from the treasury of the parent company is avoided, 
are more favored. 

By these latter plans, the parent company issues 
its collateral trust bonds, its own direct obligation, 
and exchanges them for the stocks and bonds of the 
subsidiary company. After the exchange is made, 
it then deposits these stocks and bonds of the sub- 
sidiary company, in trust with the trustee under its 
collateral trust mortgage, as security for its own col- 
lateral trust bonds, which it has given the subsidiary 
company in exchange for the stocks and bonds of the 
latter. The parent company, in this instance, does 
not pay out in cash; it merely exchanges its collat- 
eral trust bonds for the stocks and bonds of the sub- 
sidiary company, and when the latter are received 
they are deposited as security for the collateral trust 
bonds of the parent company. The subsidiary com- 
pany then sells these collateral trust bonds, the obli- 
gation of the parent company, and with the proceeds 
builds the extension or branch. By this method the 
parent company only pays interest on its issue of 
collateral trust bonds and awaits the time when the 
subsidiary company road will be built and earning 



PRIORITIES OF THE OTHER CREDITORS 285 

income to pay the interest on its bonds and dividends 
on its capital stock. 

(3) The other plan by which the parent company 
avoids an actual outlay is that whereby it issues 
its collateral trust bonds, secured by a mortgage, and 
sells them on the market. By the terms of this mort- 
gage, the trustee receives the proceeds from the sale 
of the collateral trust bonds and with it immediately 
purchases an equal amount in value, as regulated in 
the mortgage, of the bonds and the stock of the 
subsidiary company. He then holds these stocks 
and bonds so purchased as security under the collat- 
eral trust mortgage. In this case, the transaction is, 
in effect, similar to the last method, except that the 
collateral trust bonds are sold by the parent company 
instead of by the subsidiary company. 

In neither of the last two cases does the parent 
company advance the money; it merely pays the 
interest on the collateral trust bonds, until the branch 
line is built and earns income and can pay interest 
on its bonds and dividends on its stock. This is its 
only outlay of money. When the subsidiary com- 
pany pays such interest and dividends, they will at 
least be sufficient to pay the interest on the collateral 
trust bonds and thus relieve the parent company from 
further outlay. 

As a security the collateral trust bond is said to 
commend itself, as it is the direct obligation of the 
parent company, usually of a large system, and is 



286 RAILROAD BONDS AND NOTES 

quite generally secured by a first lien upon some spe- 
cific piece of property or division of the system, in- 
stead of being secured, as is the ordinary railroad 
mortgage bond, upon an entire system subject to a 
number of prior liens and mortgages. The question 
of the value of the property covered by the deposited 
mortgage and represented by the deposited stock, 
of course, enters largely into consideration. 

Bonds of consolidated railroads; bonds of the con- 
stituent roads. 

The term "consolidated bonds" is used to desig- 
nate those issued by a railroad company that has 
been formed by the consolidation of two or more 
railroad companies, theretofore existing as separate 
corporations. Each company that was consolidated 
or merged is called a "constituent" company. 

The effect of consolidation or merger of two or 
more railroads is to extinguish the original or con- 
stituent companies and, by combining them, form a 
new company. Though for the purpose of contin- 
uing their obligations, each constituent company is 
presumed, in theory, to continue. 

This new company, under the agreement for the 
consolidation, or under the statutes pursuant to 
which the consolidation was carried out, acquires all 
the property of the constituent companies, and must 
meet and pay all the debts and other obligations of 
such constituent companies. 



PRIORITIES OF THE OTHER CREDITORS 287 

The term "consolidated" bonds is also employed 
sometimes to designate an issue by a railroad com- 
pany to raise money to build a branch or extension, 
and secured by a mortgage on this branch or exten- 
sion and also on the main line. In such case, as to 
the branch or extension, this mortgage is a first mort- 
gage, and as to the main line, it takes its place be- 
hind whatever mortgages may already exist against 
that property. An issue of this kind, when a first 
mortgage on the extension, and no matter what its 
standing as a lien on the property of the main line, 
is usually called "first consolidated mortgage" bonds. 

The consolidated bond, issued by a consolidated 
company, is usually secured by a mortgage issued by 
such consolidated company, which creates a lien on 
its property. That is, the mortgage is on the prop- 
erty owned by the consolidated company at the time 
the mortgage was executed. It should always be 
borne in mind that any mortgages or other liens that 
the consolidated company may create against its 
property is always subject, inferior and junior to 
those mortgages or other liens that existed against 
that property at the time of the consolidation or 
merger. In other words, the consolidated company 
takes the property from its constituent companies in 
the condition it was in at the time of the consolida- 
tion or merger; and if the constituent company had, 
prior to that time, placed any mortgage or other lien 
against it, the property passes into the possession 



288 RAILROAD BONDS AND NOTES 

of the consolidated company with these mortgages 
or other liens continuing in full force; and when 
this property is sold, it must first satisfy, in full, such 
mortgages or other liens that the constituent com- 
panies may have placed against it prior to the con- 
solidation or merger, before the holders of the bonds 
issued after the consolidation or merger, by the con- 
solidated company, receive anything. 

The mortgages or other liens placed on the prop- 
erty by the constituent companies before consolida- 
tion are referred to as underlying liens. See Under- 
lying liens. Page 271. 

The mortgages that the consolidated company 
gives have priority over the unsecured creditors of 
the constituent companies, in payment out of the 
property covered by such mortgages. 

The distinction between the consolidation and the 
reorganization of a railroad is so generally known, 
that to point out the salient differences here may 
seem a superfluous statement of elementary princi- 
ples. In both cases a new corporation succeeds the 
old one. The reorganization of a railroad may be 
perfected among its stockholders, its bondholders or 
other creditors, without any court proceedings; 
though a road is usually reorganized after fore- 
closure of a defaulted mortgage. There is then 
usually some difficulty or embarrassment, financial 
or otherwise. The consolidation of railroads is not 
the result of any judicial or court proceedings, nor 



PRIORITIES OF THE OTHER CREDITORS 289 

the result of any financial or other embarrassment 
of the road, but is carried out by an agreement, 
authorized by the statutes of the States, between 
two or more railroad corporations, after the proper 
consents of their respective stockholders have been 
obtained. In this agreement, provision is made 
usually for the distribution of the intended stock 
of the new corporation, for its taking over the prop- 
erty of the constituent companies, and for its assum- 
ing the bonds and other debts and obligations of the 
constituent companies. 

The holders of the bonds of the constituent com- 
panies have no voice in whether or not their com- 
pany, upon whose property they have a mortgage, 
shall consolidate. They are not affected for that 
company can do nothing, in this respect, that will 
prejudice the lien of the mortgage against its prop- 
erty securing these outstanding bonds. Such mort- 
gaged property is taken over by the consolidated 
company with the lien of all the mortgages against 
it continuing in full force. And, as was seen, any 
mortgage or other lien that the consolidated com- 
pany may attempt to charge against this property 
must be inferior and junior to and is paid out of 
that property after the claims of bondholders un- 
der the mortgages of the constituent companies be- 
fore consolidation have been paid in full. 

The rights and remedies of holders of the bonds 
of the constituent companies cannot be taken from 



290 RAILROAD BONDS AND NOTES 

them by this agreement between the railroad com- 
pany and others to which they are not parties and 
have not consented. 

Where no other arrangement is made the consoli- 
dated company is answerable for the debts and lia- 
bilities of each constituent company to the extent 
of the property acquired from it, though it usually 
assumes full liability for such debts and obligations 
without any limitation. However, any mortgage 
that the consolidated company may give on the prop- 
erty it acquires by the consolidation from the con- 
stituent company, though it is subject to all mort- 
gages already existing against it, is entitled to 
priority over the unsecured debts of that constituent 
company. 

The consolidated company having thus acquired 
the franchises of the constituent companies must 
assume and perform all the public duties which were 
imposed upon the latter by their respective charters 
and franchises. 

The holders of the bonds of the constituent com- 
panies, however, cannot arbitrarily be compelled to 
accept the liability of the consolidated company in 
place of that of their original issuing company. 
The holder of the mortgage bonds of railroad com- 
panies is presumed, in law, to have in view at the 
time of his purchase that the company has the 
power to consolidate with another or other railroad 
companies. He takes his bond and mortgage sub- 



PRIORITIES OF THE OTHER CREDITORS 291 

ject to such public laws, as may exist at the time, 
authorizing railroad companies to consolidate, and 
he is bound by any provision they may make with 
respect to his right to convert his bond into the 
capital stock of the constituent company or the con- 
solidated company. 

He will not be deprived of his right to con- 
vert his bonds into capital stock by the consolida- 
tion or merger of the company issuing his bonds, 
though such rights may be regulated by the statutes 
permitting such consolidation. Holders of railroad 
bonds are bound by all laws regulating consolida- 
tions or mergers. Such regulations are usually to 
the effect that the bondholders with such privilege 
of conversion must demand their stock in the con- 
stituent company within a designated period. They 
must have a fair opportunity to do so. 

Should they not demand their stock within the 
time the statute limits them to, they are presumed 
to have assented to the plan and agreement of con- 
solidation and the provisions therein made for 
them. These provisions are usually that the hold- 
ers of the bonds of the constituent companies, hav- 
ing the privilege of conversion, shall be entitled to 
receive stock in the consolidated company, instead 
of in the constituent company, should they choose it 
or should they not exercise their right to demand 
stock of the constituent company within the time 
or in the manner regulated by the statute. 



292 RAILROAD BONDS AND NOTES 

Should the statutes or agreement, under which the 
consolidation was carried out, make no provision for 
conversion by the holders of the bonds of the con- 
stituent companies into their capital stock, and should 
the consolidated company have assumed the obliga- 
tions of the constituent companies, then such bond- 
holders are entitled to demand and receive stock of 
the consolidated company. 

Divisional bonds. 

As the name suggests, divisional bonds are those 
secured by a mortgage on a division only of a 
system. 

They are sometimes issued by a subsidiary com- 
pany and secured by a mortgage on its property, 
which is a branch or division of the parent company 
or main road. The parent company sometimes 
guarantees the bonds of its subsidiary companies. 

The security in the case of the divisional bond is 
limited to that covered by the mortgage which covers 
only that branch or division. Such divisional bonds 
are not the direct obligation of the parent company. 
Should there be no guarantee, the parent company is 
in no way liable on these bonds; should there be a 
guarantee the liability of the parent company is lim- 
ited to the terms of the guaranty. See Guaranteed 
bonds. Page 293. 

Divisional bonds, sometimes, are the direct obli- 



PRIORITIES OF THE OTHER CREDITORS 293 

gations of the parent company but secured only by 
a mortgage on a division. As to the other parts or 
divisions of the system which the mortgage does not 
cover, the holders of these divisional bonds have no 
recourse until all the mortgages and other liens 
thereon have been satisfied in full. 

The name "divisional bonds" is also sometimes 
given to the issue of a railroad that has subsequently 
consolidated. It is really the bond of one of the 
constituent companies that formerly operated a road 
that is now a branch or a division of the parent or 
main company, such issue having been secured by a 
mortgage on such branch or division executed by the 
constituent company before consolidation. Such di- 
visional bonds are entitled to be paid in full out 
of the division covered by their mortgage before any 
of the issues, secured by mortgage on the same prop- 
erty subsequently put out by the consolidated com- 
pany, receive anything from that division. 

Guaranteed bonds. 

Guaranteed bonds are issued by one railroad com- 
pany and guaranteed by another. 

The contract of guaranty is usually a printed or 
written form executed by the guaranteeing company 
whereby, for value received, it guarantees the pay- 
ment of the principal or the interest of the bonds, or 
both, as the case may be, at the time and place where 



294 RAILROAD BONDS AND NOTES 

they are payable. The guaranty may be endorsed 
upon each bond or by one separate contract include 
the entire issue. 

When the issue of bonds is guaranteed before it 
is put out, the guaranty is endorsed upon each bond 
and the bonds are usually known as "guaranteed by 
endorsement." If the guaranty is given after the 
issue, or part of it, has been put out then, of course, 
the guaranty cannot be endorsed upon each bond 
already out, nor would it be practicable to recall 
the bonds to have them so endorsed. The guaranty 
is then made by a separate contract. The effect, 
however, is the same. As to those bonds that have 
not been put out at the time the guaranty is made, 
it may be endorsed on them or they may also be in- 
cluded in the separate contract of guaranty. 

The guaranty may be to the bondholders direct 
or to the trustee in their behalf. 

The contract of guaranty is a contract independent 
of the obligation of the issuing company. It may 
be so far an independent obligation of the guarantee- 
ing company that it may be liable on its guaranty 
even though the bonds it guarantees are void. 

The guaranty of the bonds, no matter in which 
form it may be, is an incident to such bonds and 
passes into the hands of whomsoever such bonds may 
come. Each successive holder of the guaranteed 
bonds is entitled to enforce the guaranty while he 
holds it. 



PRIORITIES OF THE OTHER CREDITORS 295 

Guaranties vary in their terms according to the 
objects to be attained and the circumstances attend- 
ing the giving of the guaranty. Therefore, just 
what the guaranteeing company undertakes to do 
should be fully understood. It cannot be held be- 
yond the strict terms of its guaranty. If its liability 
depends upon any conditions, these conditions should 
be fully understood. No doubt or ambiguity should 
exist as to just what the guaranty is. In a full 
guaranty, the guaranteeing company's liability 
should be commensurate with that of the issuing com- 
pany. That is, the guaranteeing company should be 
liable to do and to pay all that the issuing company 
should; and the liability of the guaranteeing com- 
pany should become fixed immediately upon the de- 
fault of the issuing company, without any pre- 
liminaries of any kind. 

The situations and reasons that bring about a 
guaranty of railroad bonds are many and varied. 
The one most common is that of a parent company, 
the main company of a system, guaranteeing the 
bonds issued by one of its constituent or subsidiary 
companies or issued by a road that it controls by 
lease or otherwise. 

The guaranteeing of railroad bonds also results 
from the plan for the reorganization or readjustment 
of the affairs of a road. The bondholders of the 
old company find often that it is to their best inter- 
ests to help along the reorganization or readjustment 



296 RAILROAD BONDS AND NOTES 

by making concessions. At such a time they may 
accept bonds for a less amount, or for a lower rate 
of interest, in exchange for their own. They are 
often induced to do so by the guaranty of the inter- 
est or the principal, or both, of their bonds. 

Guaranteed bonds result also from the use in 
common of stations, bridges, terminals or other 
property by two or more railroad companies. One 
or more of these companies will guarantee the bonds 
of the company that owns the property so used in 
common. The bonds so guaranteed are usually 
secured by a mortgage only on this property so used 
in common, though the mortgage may be on other 
property of the issuing company. 

The after acquired property clause in railroad 
mortgages may sometimes result in a guaranty of an 
issue of bonds. The parent company which has 
already issued and has outstanding its mortgage con- 
taining an after acquired property clause, may want 
to acquire another branch or division or extension. 
This newly acquired property may fall within the 
mortgage, under the clause mentioned; therefore, to 
keep it from the inclusion of that after acquired 
property clause, the property is taken in the name of 
a corporation purposely organized to hold it. An 
issue of bonds is put out by that new corporation, 
secured by a mortgage on this newly acquired branch, 
division or extension, and guaranteed by the parent 
company. 



PRIORITIES OF THE OTHER CREDITORS 297 

Sometimes this device of holding the property in 
the name of a separate company is necessary where 
the mortgages of the parent company already exist- 
ing, have reached the limitation of indebtedness 
fixed by the laws of the State in which it was in- 
corporated; or where under the laws of the State in 
which the new division or other newly acquired 
property is situated, it is necessary that a resident 
corporation shall own it. 

The railroad company formed by consolidation or 
merger may guarantee the bonds its constituent com- 
panies issued before such consolidation or merger. 

The guaranty may be of the interest or of the 
principal, or both. 

The guaranty of interest may or may not run for 
the entire term of the bonds. 

When interest is guaranteed, in some instances, 
it is done for a limited period only. This is when 
a comparatively new company issues its bonds at a 
time when the public may not have confidence in its 
ability to earn the interest on its bonded indebted- 
ness during the period that it is establishing itself. 
Under such circumstances, the interest is guaranteed 
for such time as will carry it over the period of 
development and growth. Then the inquiry in- 
trudes: Are the possibilities of the road such as to 
develop sufficient strength to meet payments of in- 
terest beyond that period and of the principal when 
due? 



298 RAILROAD BONDS AND NOTES 

Should principal only be guaranteed, and the 
bonds are for a long time, the intending bondholder 
should consider that in the meantime much may 
happen with regard to the relation between the sub- 
sidiary company and the guaranteeing company, and 
the standing of the latter. 

Upon a reorganization of the guaranteeing com- 
pany its relation to the subsidiary company, whose 
bonds it has guaranteed, and which it has operated 
under a lease, is usually changed. The lease will 
then probably be readjusted in some way. It may 
be dropped entirely or changed to meet new con- 
ditions. 

The leased road sometimes requires security from 
the leasing company that the latter will perform all 
the obligations imposed upon it by the lease; and, 
accordingly, securities are deposited in trust, to be 
forfeited upon a breach of the lease. This, of 
course, adds to the guaranty and makes the lease 
something not to be lightly discarded. 

The holders of guaranteed bonds are not creditors 
of the guaranteeing company until the latter has 
become actually liable. That is, there must have 
been a default in the guaranteed bonds and the guar- 
anteeing company must have become actually liable 
under its guaranty. Should the guaranteed bonds 
not yet be due and the guaranteeing company be- 
come insolvent the holders of the guaranteed bonds 
are not entitled to have a dividend declared in their 



PRIORITIES OF THE OTHER CREDITORS 299 

favor as creditors of the guaranteeing company, nor 
are they entitled to have money retained in court to 
meet a possible future liability on the guaranty. 
Nor are the holders of the guaranteed bonds entitled 
to come in as creditors upon the reorganization of 
the guaranteeing company. But a provision may 
be properly contained in the agreement of guaranty 
entitling the holders of the guaranteed bonds to 
prove their claims as creditors of the guaranteeing 
company, in case of its insolvency, and to come in 
as creditors upon its reorganization, whether or not 
the bonds have been defaulted by the issuing com- 
pany and whether or not the guaranty has become 
at that time enforceable. In the absence of such an 
agreement, the holders of the guaranteed bonds are 
not entitled to prove their claims against the guar- 
anteeing company in case of its insolvency, nor to 
come in as creditors upon its reorganization, until 
the bonds have been defaulted by the issuing com- 
pany and the guaranteeing company has become 
liable on its guaranty. 

Should the guaranteeing company pay the bonds 
under its guaranty, it is entitled to be reimbursed 
from the company whose bonds it has thus paid. 
The guaranteeing company then becomes a creditor 
of the latter company to the extent of its payment 
on its guaranty. It is then entitled to all the rights 
that the holders of the guaranteed bonds that have 
been paid were entitled to, as such, against the issu- 



300 RAILROAD BONDS AND NOTES 

ing company, and it may accordingly enforce the 
payment of the bonds it has thus paid. The guar- 
anteeing company then takes the place of the holders 
of the bonds it has paid, thus becoming a creditor of 
the issuing company. 

However, should the guaranteeing company pay 
coupons as they fall due and then hold them against 
the issuing company, they would be competing 
creditors with the holders of the guaranteed bonds 
and of the subsequently maturing guaranteed 
coupons. The guaranteeing company would thus 
take from such holders part of their security. To 
prevent this it is usually arranged that should the 
guaranteeing company pay the coupons, the trustee 
under the mortgage shall receive the coupons so 
paid and cancel them. But sometimes the guaran- 
teeing company has arranged as a condition of its 
guaranty that should it pay any monies under its 
guaranty, it shall be entitled to receive an equal 
amount of interest coupons, and that on foreclosure 
it shall be entitled to payment of these coupons out 
of the mortgaged property, though not in opposition 
to or in diminution of the claims of the holders of 
the guaranteed bonds or coupons. In this way the 
guaranteed interest is paid but the coupons are not 
canceled; and while to the issuing company and its 
other creditors these coupons are considered unpaid, 
as to the holders of the guaranteed bonds and the 
other coupons, they are presumed to be canceled 



PRIORITIES OF THE OTHER CREDITORS 301 

and paid and not to be enforced so as to conflict or 
diminish their claims in any way. 

It is not part of the ordinary business of a rail- 
road company to lend its credit by guaranteeing the 
bonds of another company. Therefore, it is neces- 
sary that a railroad company shall have the power 
to guarantee the bonds of another railroad company 
expressly conferred upon it as it is not one of the 
inherent powers ordinarily possessed by railroad cor- 
porations; but the courts have recognized and es- 
tablished the rule that a railroad company may 
guarantee the bonds of another railroad company 
when the power to do so, though not expressly 
given, may be inferred from other powers and 
necessities. 

The ownership of stock in a subsidiary company 
by a parent company empowers the latter to guar- 
antee the bonds of the former. 

If the railroad company have the power to con- 
solidate with another, it has the power to guarantee 
the bonds of such corporation. The railroad com- 
pany that controls another by lease, may guarantee 
the bonds of the latter. Sometimes the guarantee- 
ing company pays the interest on the bonds under the 
contract of guaranty. Where the guaranteeing 
company pays the interest on the bonds of the road 
it has leased, the lease may provide that the payment 
of such interest shall be part of the rental. 

The guaranty given by a railroad company with- 



302 RAILROAD BONDS AND NOTES 

out any power to make the contract of guaranty is 
absolutely void and cannot be enforced. The law 
thereby protects the creditors and stockholders of 
the guaranteeing company, for any unauthorized at- 
tempt at guaranty risks the capital of the guarantee- 
ing company, to the extent of the guaranty, in the 
business of the company whose bonds are guaran- 
teed; and the capital of the guaranteeing company 
is to that extent placed under the control of the 
officers of the guaranteed company, and is diverted 
from the purposes of its own affairs to which its 
stockholders and creditors are entitled to have it 
applied. 

But the doctrine is quite generally applied that 
though the railroad company may have no express 
power to guarantee the bonds of another company, 
yet if the power to do so may be implied from its 
other powers, or is reasonably necessary to carry out 
the objects for which it is in business, this power to 
guarantee will be conceded to it. 

And when the power to guarantee is contained in 
the charter of the guaranteeing company, or may be 
implied from its other powers, or may be reasonably 
necessary to carry out the purposes of its incorpora- 
tion, then its stockholders, bondholders, and other 
creditors are presumed to have accepted their stock 
and purchased their bonds or otherwise extended 
their credits, respectively, with the probability that 



PRIORITIES OF THE OTHER CREDITORS 303 

the capital of their company might be used to guar- 
antee the bonds of other companies. 

As was seen, a guaranty given by a railroad com- 
pany that did not have the requisite power is void; 
however, if the guaranteeing company had the 
power, but did not exercise it properly, it may not 
avoid liability by reason of any defect in the execu- 
tion of the guaranty and, under some circumstances, 
it may be enforced. Where the intending bond- 
holder acted upon the faith of the guaranty, with- 
out knowledge or notice of any defect, he can claim 
the full benefits of it; for the owner of the guaran- 
teed bonds is ordinarily entitled to rest in the belief 
that the guaranteeing company has properly exer- 
cised its powers and has actually done all it should 
have done and had the power to do. The guaran- 
teeing company will not under such circumstances 
be permitted to take advantage of its own wrong or 
mistake. 

However, when the guaranty is beyond its powers 
it is void, no matter how correct it may be in form. 
The power is lacking. In the first case the company 
had the power to guaranty, but exercised it imper- 
fectly, and the court corrects that error ; in the latter 
case the company did not have any power to guar- 
anty and the court cannot give it, for that is a func- 
tion of the legislature only. 

The guaranteeing company can be held liable on 



304 RAILROAD BONDS AND NOTES 

its contract of guaranty only when, like in any other 
contract or agreement, it has received something as 
a consideration for its promise of guaranty. If the 
guaranty be given before the execution or delivery 
of the bonds, and is endorsed on the bonds before 
they are delivered, the purchase price of the bonds 
is the consideration paid for them and also for the 
guaranty. If the guaranty be given after the execu- 
tion or delivery of the bonds, the guaranteeing com- 
pany is not bound by the terms of the guaranty un- 
less it has received something for its guaranty, a 
"consideration" as the legal expression is. 

Holders of guaranteed bonds should see that 
the guaranteeing company consents to all material 
changes that are intended to be made in the bonds or 
in the mortgage ; for any change in these instruments 
without the consent of the guaranteeing company 
will discharge it from further liability. A material 
change makes it a different contract from the one 
that was guaranteed. Whether or not the guaran- 
teeing company is injured or in any way affected by 
such change is not considered. It is a different con- 
tract that now exists and is not the one that was 
guaranteed. The contract that was guaranteed is 
no longer in existence; the new contract resulting 
from such change has not been guaranteed. 

Should the time for the payment of the principal 
or interest be extended without the consent of the 
guaranteeing company, it is discharged from lia- 



PRIORITIES OF THE OTHER CREDITORS 305 

bility. But the extension must be pursuant to an 
agreement for a definite time and not a mere for- 
bearance to enforce remedies for a reasonable time. 
Whether or not the extension of time caused any 
injury to the guaranteeing company is not con- 
sidered; the time for the payment that was guaran- 
teed has been changed and the contract as guaran- 
teed no longer exists, and it is released from liability 
on its guaranty. 

When new bonds have been substituted for the 
ones that have been guaranteed, the guaranteeing 
company is released, unless a new guaranty is given. 
The old guaranty is at an end. 

Holders of guaranteed railroad bonds, however, 
do not release the guaranteeing company where they 
take additional security for their bonds, provided 
there is no extension for the time of payment of the 
guaranteed bonds nor any material changes made in 
the original contract. 

But if in addition to the guaranty and at the time 
it was given, the holders of the guaranteed bonds 
have other security and surrender the same, thus 
throwing the entire burden on the guaranteeing com- 
pany, it works a release of the latter to the extent of 
the amount that it has been injured by the surrender 
of such other security. However, in a contract of 
guaranty, like all others, the courts in construing 
them try to find from their language just what the 
parties intended, and if from the contract it appears 



3o6 RAILROAD BONDS AND NOTES 

that the bondholders have in their possession or con- 
trol securities from which their claims can be col- 
lected, and that it may be reasonably presumed that 
it was intended that these securities should be used 
up before the guaranteeing company should be asked 
to pay, the court will direct that such collateral 
security be first exhausted. But if the guaranty be 
an absolute one and no such intention as just men- 
tioned can be spelled from its terms then the holders 
of the guaranteed bonds may proceed against the 
guaranteeing company without first trying to realize 
out of such collateral securities. The language of 
the guaranty is of prime importance. It should be 
carefully noted whether the guaranty is to the effect 
that the guaranteeing company will pay as soon as 
the issuing company has defaulted, or that if the 
monies due from the issuing company cannot be col- 
lected from it, then it will pay. 

The language of the guaranty in this particular 
should be closely examined. If it is to the effect 
that the bonds and the coupons shall be paid when 
they severally fall due, it is an absolute guaranty 
and immediately upon the default of the issuing 
company, the guaranteeing company becomes liable. 
No act on the part of the bondholders or their trus- 
tee in their behalf is necessary to fix the liability of 
the guaranteeing company. 

The guarantee, however, may be that the princi- 
pal and interest, or either, as the case may be, will 



PRIORITIES OF THE OTHER CREDITORS 307 

be collected from the issuing company. This is a 
guaranty of collection and a different situation pre- 
sents itself. The guaranteeing company under such 
a guaranty becomes liable only after a failure to col- 
lect from the issuing company. Under the guaranty 
of payment^ the guaranteeing company becomes 
liable immediately upon the failure of the issuing 
company to pay according to the terms of the bonds, 
and the mortgage if there be one. 

In the guaranty of collection, the rule, rather 
broadly stated, is that all reasonable effort must be 
made and legal remedies pursued to collect from the 
issuing company, and then upon a failure to thus 
realize, the guaranteeing company becomes liable 
for such sums as are still unpaid. In some States 
the insolvency of the issuing railroad company re- 
lieves the holders of the guaranteed bonds from the 
duty of demanding payment of the company directly 
liable and pursuing their remedies against it, in order 
to hold the guaranteeing company liable. 

The usual form of guaranty is substantially to the 
effect that the guaranteeing company agrees with 
whomsoever may be the holders of the bonds or the 
coupons, as the case may be, at the time the guaran- 
tee is to be enforced, that the issuing company will 
pay the principal of the bonds at maturity, or their 
interest coupons attached, as they severally fall due, 
and, therefore, is an absolute guaranty of payment, 
and the liability of the guaranteeing company be- 



3o8 RAILROAD BONDS AND NOTES 

comes fixed immediately upon the default of the 
issuing company, without any preliminary steps. 

Guaranteed bonds are sometimes judged by the 
strength of the guaranteeing company. Undoubt- 
edly, if the principal and interest are guaranteed, 
without any limitation of liability, it is a valuable 
asset when written by a strong company. But the 
guaranty is sometimes given a false value on account 
of the feeling of safety that the word may impart. 
The intrinsic value of the bond, the legal strength 
of the guaranty and the financial strength of the 
guarantCv^ing company should be the subjects of in- 
quiry and examination. The bond should stand on 
its own merits. 

Stamped bonds. 

Where a parent company guarantees the out- 
standing bonds of its subsidiary company to enable 
it to build a branch line, it will do so sometimes by 
stamping its guaranty on the bonds. That is, old 
bonds of an outstanding issue are endorsed with the 
guaranty by stamping. See Guaranteed bonds. 
Page 293. 

In some issues, certain privileges or rights thereto- 
fore possessed by the holders of the bonds according 
to the terms of the bond or the mortgage may be 
modified or other changes necessitated by conditions 
arising since the issue was put out. These changes 
are usually brought about by a reorganization of 



PRIORITIES OF THE OTHER CREDITORS 309 

the railroad. These changes in the bond or the 
mortgage are then stamped on the bonds. 

A reference to a bond as a "stamped" bond is 
notice to all intending purchasers that there is some- 
thing added to it on mutual consent by stamping 
that changes the original bond or mortgage in some 
particular. The contract originally made between 
the holder and the issuing compan}^ and the trustee 
is thus changed and the change stamped upon the 
bond. 

Assumed bonds. 

These are the bonds of a subsidiary company that 
have been assumed by the parent company when it 
takes over the ownership or control of such sub- 
sidiary company. 

The parent company may take over the bonds of 
its subsidiary company and make them its own direct 
obligation ; or it may guarantee such bonds upon the 
issuing company becoming a part of the system of 
the parent company or being controlled by it. 

Where the parent company assumes the bonds, it 
makes them its own obligation, they then have the 
same force as if it had originally issued them, with 
the exception that its liability dates from the time 
it assumed the bonds and not from the date they were 
issued or put out. If its liability were to date back 
to the time of issue, it might thereby deprive those 
of its creditors who may in the meantime have 



310 RAILROAD BONDS AND NOTES 

obtained rights against its property, of their rights. 
Should the parent or other company that assumes 
the bonds give no mortgage or other security, then 
the holders of such assumed bonds are, so far as the 
assuming company is concerned, merely general or 
unsecured creditors. As such they can only satisfy 
their claims against such assuming company after all 
mortgages or other liens against its property have 
been satisfied in full. As to property of such as- 
suming company against which there are no mort- 
gages or other liens, they share proportionately with 
the other general or unsecured creditors. See Gen- 
eral rules of distribution; secured and unsecured 
creditors. Page 227. 

Terminal bonds. 

Terminal bonds are secured by a mortgage on ter- 
minal property. 

Railroad companies often do not own the terminal 
property they use. Such property may be owned by 
one or more railroad companies and used with sev- 
eral others in common. When all the railroad com- 
panies that use the terminal property also own it, 
the bonds usually are the direct obligation of such 
owners and are secured by a mortgage on that ter- 
minal property. For security the holder of such 
bonds is limited, of course, to such terminal property 
that has been mortgaged and if that be insufficient 
to satisfy his claim, as to the balance he is a general 



PRIORITIES OF THE OTHER CREDITORS 311 

or unsecured creditor of the issuing railroad com- 
panies. See Secured and unsecured creditors. 
Page 227. 

When several railroad companies use terminal 
property in common, and only one or more but not 
all own that property, the road or roads owning the 
terminal property may issue the bonds, making them 
their direct obligations, and then execute a mort- 
gage charging such terminal property with the pay- 
ment of such bonds. The other roads that do not 
own the terminal property, but which use it in com- 
mon, may guaranty such bonds as to principal or 
interest, or both. The strength of this guaranty de- 
pends upon the form that the guaranty takes to- 
gether with the standing of the company or com- 
panies behind it. The holders of such terminal 
bonds then can look to such terminal property that 
has been mortgaged to secure them. For any un- 
paid balance they are general or unsecured creditors 
of the issuing company, and they may also charge 
the guaranteeing company upon its guaranty. 

Terminal bonds are sometimes the obligation of a 
terminal company that owns only the terminal prop- 
erty. That is, a separate corporation is incorporated 
to hold only such terminal property. The capital 
stock of the terminal company is usually held en- 
tirely by the roads using the terminal property. 
They thus control and practically own the terminal 
company. 



312 RAILROAD BONDS AND NOTES 

The terminal company then issues its bonds se- 
cured by a mortgage on its property. These bonds 
are sometimes guaranteed by the railroad companies 
using this terminal property. Recourse can then 
only be had against the mortgaged property, i.e., 
the terminal property and the terminal company. 
The liability of the roads using the property is 
limited to the guaranties that may have been given. 

The terminal company may not be owned or con- 
trolled by the railroad companies using its proper- 
ties. It may be an independent and separate com- 
pany having no relation with the roads using its 
terminal property other than of lessor and lessee. 
Its bonds may then be only its own direct obligation 
without any guaranty from such roads. The source 
of income then from which it pays the interest on its 
bonds and meets its other obligations and expenses, 
is the rental it receives from the roads using its 
property. Though under the circumstances just set 
forth, the road or roads using this property may also 
guarantee the bonds issued by this separate terminal 
corporation. See Guaranteed bonds. Page 293. 

Bonds relating to development; development 
bonds. 

As the name suggests "development" bonds are is- 
sued to raise money for the development of the road. 

The railroad company is obligated by the terms of 
its mortgage securing such an issue, to use the money 



PRIORITIES OF THE OTHER CREDITORS 313 

thus raised for such purpose, and can be compelled 
to do so and can be restrained from using it for an- 
other object. In the mortgage the particular im- 
provement, betterment, or addition to be made, 
which enhances the value of the road beyond mere 
repairs, is specified. It is usually set forth in the 
mortgage that the money shall be turned over to 
the railroad company by the trustee, in instalments 
of fixed amounts, from time to time, as the work 
progresses. 

The nature and value of the mortgage that secures 
this issue must be examined into. A mortgage of 
this kind depends upon the circumstances under 
which the issue is put out, the condition of the road, 
and the property pledged to its payment. 

The mortgage that secures a development issue 
may create a lien on all or on only a small portion 
of the road; or its lien may attach only to the de- 
velopment or addition. Its lien may be first as to a 
part of the mortgaged property (the improvement 
or addition) and an inferior and junior lien as to 
the other parts ; or it may be a lien on all the prop- 
erty covered by the mortgage but of inferior and 
junior rank to whatever liens that may already exist 
against such property. The legal rank of such a 
mortgage and the property it covers is always a mat- 
ter for inquiry. 

Money for development, repairs, or additions is 
quite generally raised by means of a general or 



314 RAILROAD BONDS AND NOTES 

blanket mortgage. Such mortgages are made liens 
upon all the property of the road and are for sums 
large enough to meet the present needs of the com- 
pany, including developments, its future require- 
ments, and also to take up prior mortgages. See 
General mortgage bonds; blanket mortgage bonds. 
Page 269. 

Extension bonds. 

When a road builds an extension to its own line, 
the bonds with which the building, maintenance, 
and operation of this extension are to be financed 
are sometimes referred to as "extension bonds." 
The custom is to have the extension built and oper- 
ated by a company incorporated for that very pur- 
pose, thus creating a distinct legal body which is 
separate from the main or parent road whose exten- 
sion it shall be. 

This separate corporation then gives its mortgage 
on the new extension which constitutes its entire 
property. This mortgage is usually a first lien on 
such property. The parent company usually guar- 
antees these so called extension bonds. See Guar- 
anteed bonds. Page 293. Also see Collateral trust 
bonds. Page 277. 

Bonds to construction company. 

Branch lines or extensions are sometimes con- 
structed by persons individually, or by a partner- 



PRIORITIES OF THE OTHER CREDITORS 315 

ship, or a corporation sometimes formed for that 
purpose. The road or extension is thus constructed 
and then turned over complete to the parent com- 
pany. 

In payment for such construction, the contractors 
receive securities issued against such branch or ex- 
tension. 

These securities may be the stocks or bonds, or 
both, of the corporation in the name of which the 
branch or extension is held, and issued by it, the 
bonds being secured by a mortgage on such branch 
or extension; or the parent company may hold the 
branch or extension in its own name, in which case 
it will issue its own direct obligations; or the new 
company in the name of which the branch line or 
extension is held may issue its own bonds secured by 
a mortgage on such branch or extension and guaran- 
teed by the parent company. See Collateral trust 
bonds. Page 277; see also Guaranteed bonds. 
Page 293. 

The advantage to the parent company in such an 
arrangement is that it is relieved of the work of con- 
struction and also relieved of the financing of the 
securities of the branch or extension company. The 
advantage to the construction company is that it 
makes a profit. 

The thought should be present that there is the 
temptation for the constructors in marketing the se- 
curities they have thus acquired, to make a 



3i6 RAILROAD BONDS AND NOTES 

"watered" profit; and that should the officers of the 
railroad company be the same as those of the con- 
struction company, or should other friendly relations 
exist between them, there is that opportunity to 
make an inside profit against which frail man is not 
always immune. 

Car trust certificates or bonds ; equipment trust cer- 
tificates or bonds. 

Car trust certificates or bonds, equipment trust 
certificates or bonds, and equipment bonds are se- 
cured by mortgages against cars or equipment 
only. 

There is no difference between the bond and the 
certificate in these instances; they are the same in- 
struments substantially. The terms as here em- 
ployed are practically synonymous. 

Equipment bonds are issued by the railroad com- 
pany and are its own direct obligations. Car trust 
bonds or certificates and equipment trust bonds or 
certificates are the result of a trust arrangement, as 
the name suggests, and are not issued by the railroad 
company. They are issued by and are the obliga- 
tion of the trustee who holds the cars or the equip- 
ment, as the case may be, under the trust plan. 

In all these cases, however, the mortgage is against 
the cars or equipment, the legal title and ownership 
is held by the trustee, while the railroad company 
has the possession and the use of such property. 



PRIORITIES OF THE OTHER CREDITORS 317 

Under t±ie car trust arrangement, the railroad com- 
pany pays a yearly rental for the use of the cars 
which is employed to annually pay off the bonds in 
serials : and in the case of the equipment bonds, the 
direct obligations of the railroad company, it pays 
off and retires a certain proportion of the issue each 
year. In both cases, having in mind the deteriora- 
tion of the value of the cars and the equipment, the 
bonded indebtedness is thus reduced as fast, if not 
faster, than the property diminishes in value. See 
'Equipment bonds. Page 323. 

Car trust certificates or bonds result from a car 
trust arrangement which is sometimes called the 
Philadelphia Plan. 

This trust arrangement or plan is employed when 
the railroad company needs cars which it does not 
wish to purchase outright as that would mean the 
immediate outlay of money that often must first be 
raised. Should the railroad company take title to 
the cars they may fall under and be included within 
an after acquired property clause in a mortgage al- 
ready existing against the road and thus not furnish 
a security to raise money for their purchase; or they 
may in some other way become subject to the attack 
of the creditors of the company. The common pur- 
pose of the car trust plan is, no matter what the other 
considerations may be, that they shall furnish the 
security for and be the means of raising the money 
necessary in large part for their own purchase. 



3i8 RAILROAD BONDS AND NOTES 

Accordingly, an association is formed by capital- 
ists purposely to build, or to have built, or to buy 
from others, the. cars in question. A mortgage is 
made against these cars to a trustee and the title to 
them is transferred to him. The trustee now holds 
the legal title to the cars subject to the terms of this 
mortgage. He enters into a lease with the railroad 
company by which the cars are leased to the latter 
for a specified period, usually ten years. 

The railroad company, under the lease, has the 
possession of the cars and the right to use them, and 
pays an annual rental therefor. These rentals are 
considered as instalments of the purchase price, and 
when the last instalment is paid, the railroad com- 
pany becomes the owner of the cars. 

Until the last instalment of this rent is paid to 
the trustee he, in behalf of the holders of the cer- 
tificates or bonds, continues to own the cars. 

The association which supplied the trustee with 
the cars in question originally, receives its return for 
the manufacture or purchase, as the case may be, by 
the sale of these bonds or certificates and the cash 
payment that the railroad company makes. 

The railroad company pays in cash a certain pro- 
portion, usually twenty per centum, of the value of 
the cars at the time they are turned over to it, and 
the trustee issues his car trust certificates or bonds 
for the balance, which is usually eighty per centum. 

Having in kind the deterioration in the value of 



PRIORITIES OF THE OTHER CREDITORS 319 

the cars, the certificates are issued in serials. The 
issue is usually divided into as many serials as the 
lease has years to run and one serial falls due each 
year. The lease runs for ten years usually. It is 
aimed to have the bonds paid off quicker than the 
property will depreciate. The indebtedness must 
diminish at a faster rate than does the value of the 
property. 

The rental is paid to the trustee. This rental is 
usually such an amount as will pay the expenses of 
the trusteeship, yearly taxes, etc., the interest on the 
outstanding certificates or bonds of the issue and to 
retire the serials as they severally fall due. 

The railroad company agrees to keep this property 
in good repair and to replace destroyed or worn out 
parts. It also agrees to keep this property properly 
insured. The trustee has the right to inspect the 
cars during the period of the lease to see that they 
are not being neglected. 

Upon default by the railroad company in the 
payment of the rental, or other breach of its agree- 
ment, the trustee may usually, under the terms of 
the lease, retake the property and dispose of it as is 
therein specified. And upon such default it is usu- 
ally agreed in the lease that the railroad company 
shall forfeit all monies already paid and shall con- 
tinue liable for all rent then due and not paid. 

The cars while in the possession of the railroad 
company and used by it are not subject to the claims 



320 RAILROAD BONDS AND NOTES 

of any of its creditors, for the trustee owns the 
property. 

When there is a default by the railroad company, 
as was seen, the trustee is entitled to seize the cars 
from the railroad company. However, private 
rights must sometimes give way to public interests, 
and when a railroad company becomes insolvent and 
a receiver is appointed to operate the road, the court 
may order that he continue the use of these cars. 
The fact that the receiver continues to use the cars 
does not make the lease binding upon him. He may 
accept or reject the lease made by the road that he 
now operates, under order of the court, as the inter- 
ests he serves demands. 

Notwithstanding that the receiver rejects the 
lease and refuses to be bound by its terms, he may 
nevertheless use the cars. He then pays a reason- 
able value for their use during the time he actually 
used them. The reasonable value he pays may or 
may not be the same amount as is mentioned in the 
lease as the rental. When the receiver has finished 
with these cars he turns them over, under the order 
of the court, to the trustee under the lease. 

Where the railroad company has already paid a 
substantial part of the entire amount of rentals 
under the lease, the court may order that the re- 
ceiver continue and pay the balance and complete 
the transaction, whereupon the railroad company 
becomes the absolute owner of the cars. 



PRIORITIES OF THE OTHER CREDITORS 321 

Should only a small portion of the purchase price 
or rentals have been paid, it is doubtful if the court 
will order the receiver to pay the balance and com- 
plete the transaction. The rentals paid by the re- 
ceiver are regarded as expenses of the receivership 
and like all such expenses are paid in full before the 
holders of the bonds under the foreclosed mortgage 
received anything. 

When property is sold under a "conditional" sale, 
the possession of such property is given over to the 
buyer but the title and ownership of it continues in 
the seller until the buyer has paid the full purchase 
price, whereupon the buyer becomes the owner. 
See Conditional sales. Page 255. 

The car trust arrangement is sometimes called the 
Philadelphia Plan as it originated there, because the 
laws of Pennsylvania declared that a conditional 
sale, as above described, is void as to the creditors of 
the buyer and that they (such creditors) are entitled 
to take such property from the buyer in whose pos- 
session they find it in satisfaction of their claims 
just as if he were the actual owner. This is the law 
quite generally in all the States, in the absence of 
notice or knowledge on the part of the creditors that 
the actual ownership is not in such buyer. 

The reason for this rule is that the creditors of the 
buyer who has this property in his possession with 
all the signs of apparent ownership, may be misled 
into believing that such buyer actually owns this 



322 RAILROAD BONDS AND NOTES 

property and thereby may have been induced to have 
given him credit. The usual method of avoiding 
such a situation when property is sold under such 
conditions is to give notice to the world that the 
title and ownership is still in the seller and that the 
buyer merely has the right to use the property. 
This is done by recording the instrument containing 
the arrangement of the conditional sale in the office 
of the public official designated by law for that pur- 
pose, usually the register or the clerk of the county 
in which the property is. 

In most States there are laws providing that the 
lease or conditional sale of cars of a railroad shall be 
valid only if such lease or contract is in writing and 
thus publicly recorded, or when the name of the asso- 
ciation, lessor or seller, appears on both sides of each 
car covered by such arrangement. This is notice of 
the true ownership and no one is misled. Failure 
to observe these requirements will in most cases 
make the sale or lease void as to the creditors of 
the railroad company and they will be entitled then 
to claim such property in satisfaction of their 
claims. 

The car trust certificates or bonds are limited to 
those transactions where cars are involved. 

When other equipment and cars or other equip- 
ment alone is the subject matter of the arrangement 
the issue is usually called "equipment trust" bonds or 
certificates. The details of the arrangement are the 



PRIORITIES OF THE OTHER CREDITORS 323 

same as in the case of the car trust certificates or bonds. 
Car trust certificates or bonds or equipment trust 
certificates or bonds are in coupon form as a rule, 
with the privilege of registering the principal. 

Equipment bonds. 

Sometimes instead of the trust arrangement or 
Philadelphia Plan, the railroad company may pur- 
chase or own equipment outright and execute its 
mortgage against it to raise money ; under such mort- 
gage the title to such equipment is conveyed to the 
trustee, and he holds it for the benefit of the holders 
of the equipment bonds to be issued. 

Should the railroad company buy the equipment 
itself, it pays in cash usually about twenty per 
centum of its value and raises the balance by selling 
equipment bonds, its own direct obligation, secured 
by mortgage against such equipment. This mort- 
gage is invariably a first lien against such property. 

Equipment bonds are issued by the railroad com- 
pany for about eighty per centum of the value of the 
equipment. They are the direct obligations of the 
railroad company and run for ten years as a general 
rule. They fall due serially. The issue is divided 
into as many serials as the issue has years to run. 
One serial falls due each year. The purpose of this 
is to have the bonds paid off at a faster rate than the 
equipment will depreciate in value. 

In the meantime the railroad company has the pes- 



324 RAILROAD BONDS AND NOTES 

session and use of the equipment, though the title 
thereto and the ownership thereof is in the trustee 
for the purposes set forth in the mortgage. Should 
the rUilroad company default in any payment, it is 
provided in the mortgage and in the lease that the 
trustee may proceed against this equipment, seize the 
same and realize thereon for all claims under his 
mortgage. 

Bonds growing out of the reorganization or read- 
justment of the railroad company generally. 

In the reorganization or readjustment of the af- 
fairs of a railroad company that is financially em- 
barrassed, and in order to help it retrieve its stand- 
ing, bondholders and other creditors of the road 
sometimes give up certain of their rights or consent 
to have them modified (See Assented bonds. Page 
325) ; or waive the lien or priority of their mort- 
gage in favor of a later issue of mortgage bonds 
(See Trior lien bonds. Page 326) ; or consent to 
scale or reduce their claims, in the case of bond- 
holders, consenting to accept bonds for a less amount 
or for a lower rate of interest (See Scaling. Page 
328) ; or accept bonds of the newly reorganized cor- 
poration or shares of its capital stock; or agree to 
extend the time for the payment of their bonds or 
notes (See Extended bonds or notes. Page 327); 
or the secured bondholders may give up their secur- 



PRIORITIES OF THE OTHER CREDITORS 325 

ity and in return have pledged to them the income 
of the road to pay the interest on their bonds (See 
Income bonds. Page 329), the principal of which 
may or may not be secured. The interest of the in- 
come bonds is payable out of the income of the road 
only when it is earned; if income be not earned the 
bonds receive no interest. 

Assented bonds. 

Where it is attempted to reorganize the road or 
to readjust its affairs, the plan for such reorganiza- 
tion or readjustment is usually submitted to the 
stockholders and the holders of the bonds of the dif- 
ferent issues. This plan may, and it usually does, 
call for an assessment from the stockholders or some 
concession from the bondholders or holders of notes. 
Should the holders of such bonds or notes assent to 
such plan, they submit their bonds or notes, as the 
case may be, to the designated depositary and have 
stamped thereon the fact that the owner of such bond 
or note has assented to such plan. These bonds or 
notes are then called "assented" bonds or notes and 
all later holders take them subject to all the changes 
in the original terms of the bonds or notes, and in 
their mortgage where they are secured. 

The assent becomes an incident of the bond or 
note and passes with it in each transfer thereafter, 
and affects the rights of every subsequent holder. 



326 RAILROAD BONDS AND NOTES 

Prior lien bonds; preferential bonds. 

The holders of the bonds of an insolvent road may 
consent that a new issue of bonds be put out to 
raise money to place the company on a hopeful basis, 
and that such issue shall have priority over their 
own bonds in payment out of the property mort- 
gaged to secure them. That is, this new issue shall 
be secured on the same property as their bonds and, 
though later, shall be paid first. When bonds are 
thus given a prior lien by being thus preferred they 
are called "prior lien" bonds or "preferential" 
bonds. 

It should be noted that the fact that they are 
given a preference and made a prior lien does not 
necessarily make them a first lien and prior to all 
other bonds. It means that the preference or prior- 
ity thus given has reference only to the holders of 
those bonds who have consented to defer their own 
bonds. This consent is usually given because it is 
generally believed that with the aid of the funds thus 
raised, the consenting bondholders, notwithstand- 
ing the waiving of their lien in favor of the new 
bonds, will in the end be benefited by the results 
produced by the money thus raised. However, as 
to those who do not consent, the new bonds do not 
get this preference or priority, and the non-assenting 
bondholders retain their original priority of lien, and 
are unaffected by such later issue or the fact that the 
others have consented. 



PRIORITIES OF THE OTHER CREDITORS 327 

Where such consent is withheld, the conditions 
may be such that the mortgage may be foreclosed 
and the court appoint a receiver who will issue his 
certificates and thus raise the money that would have 
been forthcoming if the issue of prior lien or prefer- 
ential bonds had not been blocked. These certifi- 
cates may be given a prior lien over the mortgage. 
See Receiver's certificates. Page 210. 

Extended bonds or notes. 

In the reorganization or readjustment of a rail- 
road company, the holders of its outstanding bonds 
or notes may consent to extend the time for the pay- 
ment of their securities. This is usually done by 
surrendering their bonds or notes, as the case may 
be, and receiving in their place bonds or notes of a 
new issue with the extended date of maturity. 

However, instead of issuing new bonds or notes 
the plan may be that the old ones may be retained 
and coupons for the interest of the additional period 
issued. When this is done and there is any other 
change made in the terms of the original bonds or 
notes, and of the mortgage if they are secured, such 
change is stamped on such old bonds or notes. See 
Stamped bonds. Page 308. 

The same property that was pledged as security 
for the original bonds or notes usually remains as 
security for the new issue; though a different ar- 
rangement may at that time be made on consent. 



328 RAILROAD BONDS AND NOTES 

The extended bonds or notes are sometimes issued 
for a higher rate of interest to induce the extension 
of time; or security or additional security may be 
given. Sometimes the holders of such bonds or 
notes may consider it wise to accept the same or a 
lower rate of interest and thus help out the road at 
this critical period, when with additional time re- 
quested it may adjust its affairs.- An extension of 
the time of payment may release the guarantors. 
See Guaranteed bonds. Page 293. 

Scaling. 

By scaling is meant a reduction of the indebted- 
ness of the road by the consent of its creditors. In 
the case of the holders of bonds or notes, each gives 
up a proportionate share of his holdings. 

The amount of the outstanding indebtedness is 
reduced by the holders of the bonds and notes sur- 
rendering their holdings and receiving in exchange 
new bonds or notes, as the case may be, for the 
smaller amount and releasing the railroad company 
as to the balance. At the same time the new bonds 
or notes may be for a different rate of interest, or 
such other concessions made by such holders as the 
arrangement for the scaling may contemplate. The 
new bonds or notes, when secured, are entitled to 
the same rights under the mortgage that secured the 
surrendered bonds or notes as the latter had in the 
absence of anything to the contrary agreed upon by 



PRIORITIES OF THE OTHER CREDITORS 329 

the parties. But the arrangement under which the 
scaling is made may contain some other arrangement 
which will disturb the lien of the mortgage or the 
security that the holders had. It is all a matter of 
agreement between the parties; it is what they con- 
sent to. The holder of the bond or note that is 
sought to be scaled is not affected by any arrange- 
ment to that effect unless he has consented to it; the 
consent of the other holders of the same issue cannot 
affect his rights unless he has given them the power 
to bind them as in the case where he has consented 
to be bound by the vote of a majority of the hold- 
ings of that issue. 

Income bonds ; debenture income bonds ; mortgage 
income bonds; non-cumulative income bonds; 
cumulative income bonds; assented income 
bonds. 

Income bonds have their interest secured by a 
mortgage on the income of the railroad company. 
The right to receive any interest depends upon the 
fact whether or not sufficient income has been earned 
during that interest period to pay the interest. 

If the railroad company does not earn the inter- 
est, the holders of the income bonds are not entitled 
to it. Its non-payment is not a default : as its pay- 
ment is made dependent upon whether or not it is 
earned. 

The interest only is usually secured; and the 



330 RAILROAD BONDS AND NOTES 

security is not any tangible property of the road but 
is limited to the income only. The principal of in- 
come bonds may or may not be secured by mortgage 
on tangible property of the railroad company. 

If the principal be not secured, then the holder of 
the income bonds, so far as its principal is concerned, 
is a general or unsecured creditor. They are then 
sometimes called "debenture" income bonds. See 
Secured and unsecured creditors. Page 227. See 
also Debenture bonds. Page 11. 

If the principal of the income bonds is secured by 
a mortgage on the property of the railroad company, 
then the right of the holders of such bonds are the 
same under it as those of other bonds secured by rail- 
road mortgages; that is, their priority and rank 
among the other incumbrances against the property 
depend upon the terms and conditions of the bonds 
and mortgage and the time when its lien attached to 
the property in question. 

The income that is pledged to the payment of the 
interest of the income bonds is usually the net in- 
come arising from the operation of the road and its 
appurtenances ; though the income may be limited to 
that from a certain source. 

The rate of interest is fixed. The interest is pay- 
able semi-annually, as a rule. 

The income that is pledged to the payment of 
each instalment of interest, as a rule, is that which 
has been earned during that interest period only. 



PRIORITIES OF THE OTHER CREDITORS 331 

Should there not be sufficient to pay all the interest 
of the income bonds for that period in full, then 
those entitled to such interest are paid proportion- 
ately out of the income of that period only. The 
entire interest, or any portion thereof, as the case 
may be, of a certain interest period may be lost if 
not earned during that same period. Such is the 
non-cumulative income bond. 

The cumulative income bond provides otherwise. 
Those entitled to the interest of the cumulative in- 
come bond are entitled to have any deficit or loss of 
interest in any past period carried forward and paid 
out of future interest periods until all arrearages of 
interest have been paid in full. 

These arrearages thus carried forward and 
charged on succeeding interest periods have no better 
rights than the interest charges of such later periods 
and are paid only out of the net income of such 
future periods after all prior charges. 

Whether the income bond is cumulative or non- 
cumulative is stated on its face or in the mortgage 
securing it; should nothing be said on this point then 
the bond is non-cumulative and any loss of interest 
during one interest period is not carried forward and 
is not made a charge on succeeding interest periods, 
but is lost to the one entitled thereto. 

Income, when the term is used with relation to 
income bonds, means net income or net earnings. 

Ordinarily, the net income of a railroad is the dif- 



332 RAILROAD BONDS AND NOTES 

ference between the gross earnings and the expendi- 
tures incurred in producing them. It is what is left 
after paying the expenses of producing the income, 
including the fixed charges. 

What shall constitute income is often agreed upon 
in the bonds and the mortgage, and the mode of 
ascertaining it is regulated there also. 

The bond or the mortgage may limit the income 
to be paid for interest on the income bonds to the 
income produced from certain specified sources, such 
as, from specified branch lines or divisions of the 
system, or it may embrace the income produced from 
all sources including that earned in the operation of 
all the lines and other property then owned by the 
railroad company making the issue and, in addition, 
from all that may be acquired at any time during the 
life of the mortgage. 

The board of directors of a railroad company 
have a wide discretion in determining what shall be 
treated as income, in the absence of anything in the 
bond or the mortgage limiting their powers in that 
respect. The personnel of the board of directors 
is therefore an important factor to be considered, and 
it is worthy of attention that they shall not use 
monies that should go to the payment of interest on 
income bonds, to make betterments that enhance the 
value of the property beyond mere repairs, improve- 
ments, or extensions when they are not necessary. 

The railroad company owes the duty to the hold- 



PRIORITIES OF THE OTHER CREDITORS 333 

ers of the income bonds to keep books of account of 
their earnings and expenses of the mortgaged road 
and the other property from which the income 
pledged to them is to be derived, so that they can 
readily see what the net income is. And the trus- 
tee under the mortgage securing the income bonds, 
when there is a mortgage securing them, owes the 
active duty to his bondholders to supervise the ac- 
counts and see that their rights are properly re- 
garded. 

The accounts should show the net income for each 
interest period. Where several lines or divisions 
of the road are separately mortgaged, the duty is 
then imposed on the railroad company to keep sep- 
arate accounts as to each. And the holders of the 
income bonds issued against the income of one line 
or division have the right to insist that expenditures 
chargeable to another shall not be charged against 
the income mortgaged to them. 

The gross earnings of a period shall bear only the 
expenses incurred in producing it and the fixed 
charges of the railroad company for that period. 
And the holders of non-cumulative income bonds 
are entitled to insist that a special or unusually large 
amount which fell due and was paid and was 
charged in any one interest period to their loss of 
interest, shall be apportioned among other interest 
periods and adjusted with a view to v/hat is fair to 
the interests of all concerned. 



334 RAILROAD BONDS AND NOTES 

When the affairs of a railroad company are af- 
fected by leasing or consolidation or merger, there 
is the likelihood that the standing of the income 
bonds may be changed. They are then sometimes 
guaranteed as to principal or interest, or both, by the 
new corporation, or the new system or some of its 
members, resulting from such consolidation or 
merger, or by the main oi parent company which is 
a party to the lease. Or an arrangement may be 
substituted whereby a regular stipulated interest 
shall be paid and regarded as a fixed charge, to be 
paid on designated interest days. The interest 
thereafter is not dependent upon the earnings of in- 
come as was originally agreed upon but is a fixed 
charge. 

When such changes are made in the income bonds, 
they are noted on the bonds themselves, and they 
are then known as "assented" income bonds; or the 
old issue may be surrendered and other bonds con- 
taining the changes are received in exchange. See 
Assented bonds. Page 325. 



CHAPTER VIII 

RIGHTS AND REMEDIES WITH RELATION TO THE 
REORGANIZATION OF THE RAILROAD COMPANY 

Different forms of reorganization; new charter; 
sale or lease of property; consolidation or 
merger; by assessment of stockholders; bond- 
holders waiving lien and accepting new securi- 
ties; scaling; new management. 

A reorganization of a railroad company, using the 
term broadly, is a readjustment of its affairs. 

To proceed under a new charter after the time 
limited in the original one has expired, or where the 
original charter has been lost by forfeiture or dis- 
solution of the railroad company, has been regarded, 
in this broad sense, as a reorganization. 

The lease or sale of all or nearly all of the prop- 
erty of a railroad to another is in effect, quite gen- 
erally, a reorganization of its affairs. 

A reorganization results from the consolidation of 
one railroad with or its merger into one or more other 
railroad corporations or a system. 

Other methods by which the affairs of an em- 
barrassed railroad company are rearranged are called 
reorganizations that may be termed, more properly, 

335 



336 RAILROAD BONDS AND NOTES 

readjustments. For instance, the insolvency of the 
road and imminent foreclosure may be brought 
about because its earning capacity is limited, pnnci- 
pally on account of lack of funds with which to pro- 
vide adequate equipment and improvements neces- 
sary to develop its possibilities and enable its busi- 
ness to be handled with economy and profit. The 
funds necessary for this purpose are sometimes raised 
by assessing the stockholders. With the money so 
provided, interest due on the bonded indebtedness is 
paid, the road is equipped and put in a profit earning 
condition, restored to solvency, and a foreclosure 
avoided. However, should the stockholders refuse 
to pay the necessary assessment, then the bondhold- 
ers foreclose their mortgage and ask the court to ap- 
point a receiver, which is usually done. Under 
order of the court, receiver's certificates are issued 
and sold to raise the money with which to meet neces- 
sary requirements, and the road is thus continued in 
operation, and in time put in a profit earning con- 
dition. The proposition is then submitted to the 
stockholders that they supply the necessary money, 
to be raised by pro rata assessment among themselves, 
with which to pay off these certificates and the ex- 
penses of the receivership, and take back the road in 
its profit earning and readjusted condition. Should 
the stockholders not do so then the foreclosure pro- 
ceeds to a sale of the mortgaged road. 

Sometimes the secured bondholders come to the 



REORGANIZATION OF THE RAILROAD 337 

aid of the insolvent road — which may be only tem- 
porarily embarrassed — and extend the time for the 
payment of their bonds or arrange about the interest. 
See Extended bonds. Page 327. Or they may 
waive the lien of their mortgage in favor of 
those lending money to the company at this critical 
time. See Prior lien bonds; preferential bonds. 
Page 326. This is done by such bondholders con- 
senting that a new issue of bonds for a specified 
amount be issued and that it shall be secured by a 
mortgage on the property of the road which shall be 
entitled to priority in payment out of the mortgaged 
property over their mortgage; or they may consent 
that the holders of the new issue of bonds shall 
share with them equally in the security their mort- 
gage gives them. These latter arrangements are ac- 
complished by such bondholders surrendering their 
bonds and taking in exchange others under the new 
mortgage, which is issued for an amount that will 
cover the bonds to be surrendered and the bonds for 
the money to be raised. With the surplus so raised 
the road is relieved from the embarrassments that 
pressed it and resumes profitable operation. Or the 
bondholders may exchange their interest bearing 
bonds for income bonds, thus reducing the fixed 
charges and making the payment of interest depend- 
ent upon the fact that it has been earned. See In- 
come bonds. Page 329. 

Again, should the creditors and the stockholders 



338 RAILROAD BONDS AND NOTES 

be willing, the affairs of the company may be placed 
upon a better footing by all consenting to give up 
part of their bonds, notes, claims, or stock, and thus 
reducing fixed charges relieve the company of the 
burdens, or some of them, that interfered with its 
profitable operation. This is called scaling. Each 
scales down his demands or rights proportionately. 
To carry out a readjustment of this kind the consent 
of those participating must be obtained. Those 
who do not consent occupy their original positions: 
the arrangement cannot be forced upon them. 
Should the holders of a large amount of the securi- 
ties or claims sought to be scaled object, it renders 
the plan inoperative and a foreclosure and a receiver- 
ship are likely to follow. The objection of the 
holders of a small amount may be overcome by pur- 
chasing their securities. See Scaling. Page 328. 

Where the management of the road has been in- 
competent, inefficient, or influenced by conflicting 
interests or improper motives, a radical and complete 
change in this respect is also a kind of readjustment 
or reorganization. 

Outline of procedure in reorganization. 

When the trustee forecloses the mortgage or 
during the period when the affairs of the company 
have reached the crisis that makes reorganization 
expedient, the holders of the obligations of a railroad 
company and others financially interested in its 



1 



REORGANIZATION OF THE RAILROAD 339 

affairs usually come together, form an agreement 
among themselves and formulate and work out a 
plan by which the road is purchased, is put in as good 
physical and financial condition as the circumstances 
reasonably warrant, and is continued in operation. 

The initiative is taken usually by the holders of 
the larger blocks of the securities or by a leading 
banking house. 

The course pursued is for a number of men 
well known in the financial world, to form 
themselves into a committee which prepares and 
submits an agreement for reorganization, in which 
it is arranged that the bondholders and others 
participating shall deposit their securities with the 
depositary that is named (usually a trust company) 
and that thereupon they shall become parties to the 
agreement. These agreements are interchangeably 
called "reorganization agreements," "bondholders' 
agreements," or "agreements of deposit." By what- 
ever name called, they are agreements under which 
the parties financially interested in the affairs of the 
embarrassed railroad attempt to reorganize it. The 
agreement contains the duties and rights of the com- 
mittee and of those who become parties to it. 
Pursuant to this agreement a plan is adopted by 
which it is usually arranged that the road shall be 
purchased at the foreclosure sale or otherwise, by the 
committee, as the representative of the parties to 
the agreement. When the road is thus purchased 



340 RAILROAD BONDS AND NOTES 

it is turned over to a new corporation. This new 
corporation takes the property thus conveyed to it, 
generally speaking, free from the debts of the old 
company, and proceeds to operate it under new 
management and relieved from many of the burdens 
that hampered the old company. The property is 
purchased with the bonds or other securities that 
have been deposited under the agreement, together 
with such assessments that may have been levied or 
monies raised by other means under the reorganiza- 
tion agreement or the plan. The securities of the 
new corporation are issued to those participating in 
the reorganization, to represent their interests in the 
property purchased. The new corporation is 
financed by selling its capital stock, by issuing its 
bonds or notes, and by obtaining credit. 

Attitude of courts toward reorganizations; pro- 
posed reorganization must be fair. 

The courts recognize that large sums of money 
are necessary to purchase railroad property at fore- 
closure sales, and therefore favor those means by 
which holders of the bonds and other obligations of 
the road may unite their securities and make a bid 
large enough to protect the property from sacrifice. 
By thus combining their securities, these holders are 
able to make a purchase which separately they could 
not. 

The law condemns a reorganization that is merely 



REORGANIZATION OF THE RAILROAD 341 

a guise for stifling competition in bidding; and the 
courts will stop such an attempt by injunction, and 
set the transfer aside if it is carried out. 

That the holders of the outstanding obligations 
of the company, or a portion of them, have united 
for the purpose of purchasing the property of the 
road does not preclude others from bidding at the 
sale. 

Courts favor reorganizations when proper as they 
save a probable sacrifice of the security, for the far 
greater value of railroad property lies not in its in- 
trinsic value as property, but in its cohesive use and 
operation as a railroad. And, too, the reorganiza- 
tion of the road continues it in operation, thus en- 
abling it to serve the public and to discharge its 
obligations in that regard. 

The agreement and the plan for the reorganiza- 
tion must be fair. Should it be, in any way, fraudu- 
lent or oppressive to a minority, no matter how 
small, of the parties participating, the court will 
protect those against whom it unfairly operates and 
may prevent a reorganization from being carried 
out, or otherwise provide for them. Courts will not 
allow a majority, no matter how large, of the hold- 
ers of the securities of the road, nor any set of them, 
to gain any advantage over their associates through 
the means of a reorganization. 

The legislatures of nearly all the states have en- 
acted laws aiding the purchasers of the franchise 



342 RAILROAD BONDS AND NOTES 

and the property of a railroad corporation at a fore- 
closure sale to form a new corporation to continue 
the road in operation. 

Rights of bondholders, generally, to participate in 
the reorganization; to receive notice and op- 
portunity to examine proposed agreement for 
reorganization. 

Each bondholder has an equal right to participate 
in any reorganization or proper combination by the 
other bondholders under the same mortgage to pur- 
chase the property of the road. The law will not 
permit any discrimination to be made against any 
bondholder of the same issue. All have a common 
interest in the security. Each has rights equal to 
the rights of those attempting the reorganization. 
All must have an equal opportunity to come in and 
share in the benefits of any reorganization and pro- 
tect their security. 

Each bondholder entitled to join in the reorgan- 
ization must be given a fair opportunity to do so 
and to become acquainted with the terms of the pro- 
posed agreement for reorganization. He is entitled 
to a reasonable notice (usually by publication in 
the newspapers) of the terms of the agreement, or of 
the fact of its preparation and filing and where he 
may examine it. After this he must have a fair op- 
portunity to decide whether or not he wishes to be- 
come a party to the agreement and participate in 



REORGANIZATION OF THE RAILROAD 343 

the reorganization it contemplates. Printed copies 
of the agreement are usually furnished by the de- 
positary on application. 

Rights of bondholders who do not join in the reor- 
ganization; rights upon withdrawal from 
agreement or abandonment of reorganization; 
reorganization by majority against objections 
of minority ; provisions in mortgage empower- 
ing majority ; interest of minority protected by 
the courts. 

A bondholder may refuse to join in the agreement 
or the plan for reorganization. He cannot be com- 
pelled to join as the enterprise of the new corpora- 
tion that is contemplated cannot be forced upon him 
unless, by the terms of the mortgage securing his 
bond, he has agreed to be a party to the reorganiza- 
tion proceedings commenced under it by the holders 
of a majority (or other designated proportion) in 
amount of the outstanding bonds of that issue. 

A bondholder is entitled to stand upon his orig- 
inal rights and to receive his proportionate share of 
the proceeds of the sale of the property that was 
mortgaged or pledged to secure the issue of bonds of 
which he holds. His rights in this respect cannot 
be affected, in any way, by a reorganization to which 
he is not a party. 

One who was a party to a reorganization agree- 
ment, but has withdrawn from it, stands upon 



344 RAILROAD BONDS AND NOTES 

the same footing as he did before he became a party 
to such agreement, and is entitled to his proportion- 
ate share of the proceeds of the sale of the property 
that was mortgaged or pledged to secure the issue of 
which he holds. And when a reorganization is 
abandoned, in the absence of anything agreed upon 
to the contrary, the rights of the parties are the same 
as if no reorganization had been attempted : that is, 
each is entitled to his proportionate share of the 
proceeds of the sale of the property that was mort- 
gaged or pledged to secure the issue of which he 
holds. When an attempted reorganization is dis- 
solved or abandoned it is invariably only under some 
arrangement whereby its parties shall pay propor- 
tionately certain specific expenses or advances and 
bear obligations already incurred. 

In some railroad mortgages a provision is con- 
tained that the holders of a majority, in amount of 
the obligations it secures, shall have the power to 
reorganize the road upon its default and insolvency. 
A majority of a specified proportion may be men- 
tioned. The majority, or the requisite majority, 
under such a provision, formulate their reorganiza- 
tion agreement and plan, and it is binding on the 
minority. The minority under these circumstances 
will not be heard to object because it has consented 
to be bound by the act of such majority, in this re- 
gard, when it accepted its bonds under the mortgage 
containing this provision. But the majority must 



REORGANIZATION OF THE RAILROAD 345 

exercise this power in good faith. Should it abuse 
it and act fraudulently or oppressively, the minority 
will not be bound by its acts. 

And even though there be no such provision in 
the mortgage giving the majority the power to re- 
organize and bind the minority by its acts, or of any 
statute to the same effect, the courts will not permit 
a small minority, representing a comparatively in- 
significant amount of the outstanding bonds, to de- 
feat the wishes of an overwhelming majority in 
amount, when there is no pretense of fraud or unfair- 
ness in what the latter propose doing. The action 
of the courts in this regard is based upon the con- 
clusion that the public obligation that the railroad 
company owes to continue the road in operation, is 
superior to the private property rights of such mi- 
nority; and, therefore, under the circumstances men- 
tioned, will assist in carrying out a railroad reorgan- 
ization against the objections of a small minority, 
in amount, of bondholders. 

When the reorganization is thus carried through 
against the objections of a minority, the court will 
see that such minority is fairly treated and its inter- 
ests fully protected. The provisions for the object- 
ing minority depend entirely upon the facts and 
circumstances of each particular case before the 
court. The precedents show that the courts have 
ordered that the bonds of the minority be taken 
care of by deposit of the money due with the court, 



346 RAILROAD BONDS AND NOTES 

or by an indemnity bond, to secure their pay- 
ment. 

Bondholders may reorganize alone; or with other 
creditors, or with the stockholders, or with 
both; interests of unsecured creditors pro- 
tected ; rights of stockholders of insolvent com- 
pany; terms upon which they may acquire 
rights in new company. 

It has been found expedient, at times, that the 
bondholders, secured by the foreclosed mortgage, 
should ask other creditors of the insolvent company 
or its stockholders, or both, to join them in a pro- 
posed reorganization, and share in the new corpora- 
tion according to their respective rights, as well as 
the same can be adjusted. This is to avoid the em- 
barrassment and delay that such other creditors and 
stockholders may cause to a reorganization conducted 
exclusively by the bondholders under the foreclosed 
mortgage; and, as the stockholders usually pay in 
cash for such stock of the new corporation that they 
get, the money thus raised is a timely aid to the new 
corporation and helps along the reorganization. 

The bondholders under the foreclosed mortgage 
and the stockholders may unite for the purpose of 
reorganizing; but such a combination must not be 
for any fraudulent purpose. And where unsecured 
creditors- show that the purchase and reorganization 
by the bondholders in combination with the stock- 



REORGANIZATION OF THE RAILROAD 347 

holders (or a reorganization by the stockholders 
alone) is for the purpose of destroying their inter- 
ests, they are entitled to have all proceedings stayed 
until the matter has been fully examined into and 
their interests accorded a proper protection; if the 
property has been already purchased and taken over, 
they may follow it into the possession of the new 
corporation and the courts will enforce their rights 
against it. 

Stockholders of the old corporation have no right 
to any of its property until every creditor has been 
paid in full ; and if by any plan of reorganization, or 
otherwise, they attempt to take to themselves prop- 
erty of the road before every creditor has been paid 
in full, it is a fraud on such unpaid creditors who 
may enforce their claims, according to their respec- 
tive ranks, against such property that the stock- 
holders have thus wrongfully taken to themselves. 

A stockholder is entitled to his proportionate share 
of the assets of the corporation after every debt has 
been paid in full and every obligation has been fully 
discharged. The ownership of stock in an insolvent 
corporation carries with it no rights in its assets. 
If the company be insolvent, it has not sufficient 
assets to pay all its creditors, and, therefore, it owns 
nothing itself, and its stock cannot represent any- 
thing. And stockholders in an insolvent railroad 
company can acquire no rights in the new corpora- 
tion by reason of their ownership of stock in the old 



348 RAILROAD BONDS AND NOTES 

company; they must pay for any rights in the new- 
company with money or property. 

However, that one is a stockholder in the in- 
solvent railroad company is no objection to his par- 
ticipating in the reorganization independently of his 
ownership of stock; for he may be also a bondholder 
or other creditor of the road, or he may pay for 
whatever interest in the new company that he may 
acquire. 

As the foreclosure sale of the property of the in- 
solvent company cuts off all rights of its stockholders 
in the property sold, they can have no rights in the 
property taken over by the new corporation, and can 
have only such rights in the new corporation or its 
property as the reorganization agreement or the 
plan gives them. And it is quite proper for the 
agreement or the plan to make provision for the 
stockholders. These provisions are usually to the 
effect that the stockholders may obtain stock in the 
new corporation by surrendering their old stock and 
paying a specified sum for the new stock. The 
agreement or the plan may leave it to the committee 
to fix this amount. The committee must render an 
accounting of expenses and indebtednesses showing 
the financial condition that exists, and revealing the 
computation upon which it bases the amount of this 
assessment, so that they (the stockholders) may 
have an opportunity to examine into the matter, and 
call upon the court to protect them should the as- 



REORGANIZATION OF THE RAILROAD 349 

sessment be unfair or improper. However, in the 
absence of fraud or unreasonable conduct in fixing 
this amount, the court will not interfere with the 
action of the committee. 

S3mopsis of reorganization agreement. 

The agreements by which the reorganization of a 
railroad company is attempted to be worked out are 
variously known as "reorganization agreements," 
"depositors' agreements," or "bondholders' agree- 
ments." 

This agreement is made between the committee, 
the bondholders under the foreclosed mortgage and 
such others as shall join in with them. The depos- 
itary is also sometimes made a party. 

A reorganization agreement is a contract between 
the parties to it. It appoints the committee which 
shall represent the bondholders and the other parties 
to it, in the reorganization proceedings. It usually 
provides that the parties shall deposit their bonds 
or other securities, and gives in detail the rights and 
obligations of those who become parties to it. The 
powers and duties of the committee with relation 
to such deposited securities and such other property 
as it may acquire in the course of the reorganization 
are specified. It provides for the preparation and 
adoption of the plan (which is usually a separate 
document) by which the property of the road shall 
be purchased, the new corporation formed, and 



350 RAILROAD BONDS AND NOTES 

property conveyed to it. It sets forth the rights of 
all the participating parties in such new corporation. 
The agreement or the plan may also provide for 
further powers in the committee, such as making 
changes in the agreement or the plan, extending the 
time within which the securities shall be deposited, 
and extending the time within which the plan shall 
be consented to or objected to. Provisions may be 
contained also, either in the agreement or in the plan, 
as to the expenses and compensation of the commit- 
tee, and how such committee shall be constituted 
when its membership is depleted by resignation, 
death, or otherwise. The agreement or the plan may 
provide for assessments to be charged against the 
bondholders and others participating in the reorgan- 
ization. 

In most of the States there are statutes relating to 
reorganization of railroad corporations; and when 
this is the case, the provisions of such statutes are 
part of the reorganization agreement and the plan, 
and the parties are bound by them with the same 
force and effect as if they were set out in the agree- 
ment or the plan at length and in detail. 

Becoming a party to the agreement ; by signing ; by 
deposit of securities; limitation of period; ex- 
tension of period; penalty. 

The agreement states the manner in which the 
bondholder shall become a party to it. Some pro- 



REORGANIZATION OF THE RAILROAD 351 

vide, though rarely, that one may become a party to 
it by signing his name thereto. Most agreements, 
however, declare that one shall become a party to 
them by depositing the specified securities held by 
him against the insolvent corporation with the de- 
positary. The act of depositing and the acceptance 
of the certificate of deposit, issued by the depositary, 
signify a consent to the agreement and its terms, and 
the depositor then becomes a party to it with the same 
effect as if he had subscribed his name to such agree- 
ment. When the bondholder deposits his bonds he 
receives a certificate of deposit from the depositary, 
which represents the securities deposited by him. 
See Certificate of deposit. Page 353. 

Usually the time within which one may become 
a party, in any of the ways mentioned, is limited. 
The time may be extended by the committee or by 
the court. To have the time thus extended is not 
an absolute right that the bondholder may insist 
upon; it rests with the committee whether or not 
the time shall be extended. However, the courts 
seem disposed, judging from the trend of decisions, 
to permit bondholders an opportunity to come in 
and share in the reorganization upon such terms as 
shall be fair to all the parties, up to the time of the 
foreclosure sale and in some instances thereafter. 

As a condition for the privilege of coming in after 
the time has expired, the court or the committee, 
whichever grants the privilege, may impose a pen- 



3p RAILROAD BONDS AND NOTES 

alty. The amount of the penalty imposed on each 
bond usually does not exceed one per centum of its 
face amount. 

And extension of the time within which the bonds 
may be deposited after the time limit has expired 
may be conferred on all bondholders generally or in 
specific cases only. 

After one has become a party to the agreement, 
in order to continue as such party and enjoy its bene- 
fits, one must comply with all its requirements as to 
assenting to or dissenting from the plans submitted, 
paying assessments, and meeting all other conditions 
it may contain. 

Use of deposited bonds; how bonds deposited. 

The requirement that bondholders in order to be- 
come parties to the agreement for reorganization 
shall deposit their bonds with the depositary serves 
a double purpose, for in addition to signifying the 
intention to join the agreement, it places the bonds 
in the control of the committee to use them to pur- 
chase the property of the road and also for the other 
purposes of the reorganization. 

The committee holds the deposited bonds in trust 
for the purposes of the reorganization. It may use 
them only in strict accordance with the terms of the 
agreement under which they were deposited. The 
agreement usually authorizes the committee to use 
and dispose of the deposited bonds to purchase the 



REORGANIZATION OF THE RAILROAD 353 

property of the insolvent road, and for any other 
purpose which in its judgment it believes necessary 
to carry out the reorganization. 

Coupon bonds are deposited with all unpaid cou- 
pons attached, that is, coupons that have matured 
and have not been paid and those not yet matured. 

Registered bonds are deposited with such trans- 
fers, assignments, powers of attorney, or proxies, 
invariably in blank, as will pass a full title to such 
bonds to the committee and enable it to use them for 
the reorganization. 

Upon receiving the bonds the depositary issues a 
certificate of deposit to the depositor. Temporary 
receipts are usually issued, which are later exchanged 
for the engraved certificates of deposit. 

Certificate of deposit; its transfer; negotiability; 
rights of transferor and transferee; interest 
on bonds represented by certificates of deposit. 

The certificate of deposit is a writing issued by 
the depositary upon receiving the bonds or other 
securities deposited under the agreement. It is in 
such form as the committee shall approve. It in- 
variably certifies that the depositary has received 
from the depositing party certain bonds, describing 
them, with coupons attached, if that be the case; 
that the bonds have been deposited subject to the 
terms and conditions of the agreement for reorgan- 
ization and that the holder of such certificate, by 



354 RAILROAD BONDS AND NOTES 

accepting it, consents to and is bound by the provi- 
sions of the agreement and is entitled to share in 
all benefits and advantages of the reorganization; 
or (it continues), the bonds so deposited, together 
with the coupons attached, may be returned to or 
withdrawn by the holder of the certificate, upon 
compliance with the terms of the agreement, by pre- 
senting and surrendering the certificate, duly en- 
dorsed. The certificate further states that it is trans- 
ferable only on the books kept for that purpose at 
the office of the depositary, upon surrender of such 
certificate, duly endorsed, and thereupon a new cer- 
tificate will be issued to the transferee in exchange. 

The committee usually has the power to declare 
the transfer or registration books of the depositary 
closed, from time to time, for such periods as it may 
deem expedient. 

The certificate of deposit may be made payable to 
bearer. It is then transferable by delivery from 
hand to hand. As a rule, however, these certifi- 
cates are not made payable to bearer, but are made 
in the name of the depositor, and each transfer must 
be registered on the books of the depositary, if its 
new owner wishes to claim rights as a party to the 
reorganization. When in this usual form, to trans- 
fer it, it is presented and surrendered to the depos- 
itary and a new certificate is issued in its place, which 
is in turn registered in the name of the new owner. 

The certificate of deposit is impressed with the 



REORGANIZATION OF THE RAILROAD 355 

terms of the agreement into the hands of whom- 
soever it may be. 

Should the holder of a certificate transfer it, the 
new holder becomes substituted in his place as a 
party to the agreement and is entitled to all its 
benefits and charged with all its duties. 

It is invariably provided in the agreements, that 
the holders or bearers for the time being of nego- 
tiable certificates of deposit, and the registered hold- 
ers for the time being of registered certificates of 
deposit, may be regarded as the absolute owners 
thereof and possessed of all the rights and charged 
with all the duties of the original owners. 

Certificates of deposit are sometimes listed on the 
stock exchanges. 

They do not draw interest. Of course, the inter- 
est on the bond continues to run during the fore- 
closure action, but it is not paid as a rule, unless 
there is money on hand for that purpose and the 
court orders the receiver to do so. Should condi- 
tions warrant it the court may order the receiver to 
pay the instalment of interest due. As the commit- 
tee is to all intents and purposes the owner of the 
deposited bonds so far as the right to receive the 
interest or principal thereof is involved, the interest 
is paid to it. The depositary, however, usually re- 
ceives this money and at the direction of the com- 
mittee, pays it over to the holders of the certificates 
of deposit. 



356 RAILROAD BONDS AND NOTES 

When the interest is not paid by the receiver un- 
der order of the court, on the deposited bonds, the 
committee may advance to the holders of the certifi- 
cates the amount of such interest as a loan from it 
to them. To raise the money necessary for such 
advances, the committee may pledge such bonds and 
their unmatured coupons. When such a loan is 
made it is noted on the certificate of deposit held 
by the party receiving the money. Should a party 
withdraw from the agreement, he shall not be en- 
titled to receive the bonds represented by his cer- 
tificate of deposit until, among other things, he has 
returned such interest so advanced to him with in- 
terest thereon. 

When the reorganization has been carried out the 
certificates are surrendered to the depositary and 
the new securities are delivered in their place. 

Synopsis of the plan for reorganization. 

The plan contains the details of the arrangement 
by which the property of the insolvent road is to 
be acquired at the foreclosure sale or otherwise, the 
terms under which the corporation shall be reorgan- 
ized or a new corporation formed, how the property 
acquired shall be transferred and held by such new 
company, what stock and securities the new corpo- 
ration shall issue, the rights and standing that the 
bondholders, the other creditors, and the stockhold- 
ers, shall have in the reorganized corporation or the 



REORGANIZATION OF THE RAILROAD 357 

new corporation, and what stock or securities shall 
be allotted to each to represent his interest in the 
reorganized or the new corporation, the assessments 
that shall be levied against stockholders and others, 
and such other matters are provided for as in each 
particular case the exigencies require. 

The plan has such financing in view as will start 
the new corporation in business on a promising basis. 
The stockholders of the old corporation, it usually 
provides, may become such of the new corporation 
upon paying a specified sum for each share of stock 
issued to them. The plan may contemplate also 
an issue of bonds by the new corporation to raise 
money, among other purposes, to pay off receivers' 
certificates or other charges or liens existing or con- 
tinuing against the property with which it shall do 
business. 

Where the property against which mortgages are 
liens is taken over by the new corporation subject 
to such mortgages, holders of the bonds of the old 
company secured by such mortgages may deem it 
advisable to assist the new corporation, and, accord- 
ingly, may surrender their bonds and in exchange 
take bonds of the new corporation at a lower rate 
of interest, extending the time of payment, and 
sometimes for a less amount, releasing the balance. 
Sometimes the bondholders may think it good policy 
to waive their lien against such property, under their 
mortgage, in favor of a new issue that the new cor- 



358 RAILROAD BONDS AND NOTES 

poration puts out or exchange their bonds for those 
of such new issue. 

In these and other ways that the plan may con- 
tain, the effort is made to start the new corporation 
on a financial basis as satisfactory as the conditions 
warrant. 

The plan may contain provisions for assessments 
which the committee shall have authority to levy in 
its discretion against the parties participating in the 
reorganization; a maximum amount may be fixed, 
however, beyond which the committee shall not go 
in assessing each bond or share of stock. 

Filing the plan; giving notice thereof; reasonable 
opportunity to examine it; proposed changes; 
remedies when committee fails to file plan or 
give proper notice. 

Sometimes the committee is given the authority, 
in its discretion, to adopt a plan and put the same 
into operation without submitting it to the parties 
to the agreement for their approval. Any plan 
adopted under such authority, in the absence of any 
fraud or abuse of power, is binding on all the parties 
to the agreement. 

Usually, however, it is the duty of the committee 
to submit the plan, or any material changes in it, 
to all the parties to the agreement for their approval 
or disapproval. 

When it is the duty of the committee to submit 



REORGANIZATION OF THE RAILROAD 359 

the plan to the parties to the agreement for their 
approval or rejection, it must file its proposed plan 
with the depositary. Each party to the agreement 
is entitled to notice of the fact that the plan has 
been filed, so that he may examine it and acquaint 
himself with its terms. This matter of notice is 
usually provided for in the reorganization agree- 
ment. The usual provision is that the notice shall 
be published in newspapers of general circulation in 
specified cities that are recognized financial centers, 
and sometimes, in addition, that copies of the notice 
and the plan shall be mailed to each registered holder 
of the certificates of deposit, to his address as the 
same appears on the books of the depositary. 

Should the committee propose making material or 
important changes in the plan, when it is its duty 
to submit the same to the parties to the agreement, 
it must file such changes with the depositary, and 
give notice thereof. The notice and manner of giv- 
ing it are usually the same as in the case of the filing 
of the original plan just discussed. 

Each pa;'ty to the agreement is entitled to a rea- 
sonable opportunity to examine the proposed plan or 
the proposed changed plan. 

Should the committee, when it is required to do 
so, fail to file the original plan, or the changed plan, 
the court will compel it. And if the original plan 
or the changed plan be filed under such conditions, 
as to time and circumstances, that the parties do not 



36o RAILROAD BONDS AND NOTES 

have a reasonable opportunity to examine it, the 
court will relieve them of any default they may be 
guilty of due to this delinquency of the committee. 
And the court will see that the parties are accorded 
a fair chance to become acquainted with the terms 
of these documents, so that they may determine the 
course they shall pursue with respect to them. 

How plan is formulated and submitted ; when con- 
tained in agreement; discretion of committee 
to adopt plan; submitting plan for assent or 
dissent; expressing assent or dissent; amount 
necessary to approve or reject ; written assents 
or dissents; majority and minority rights on 
approval or rejection of plan. 

As a general rule, the committee formulates the 
plan or adopts one formulated by others, and sub- 
mits it to the parties to the agreement for their 
approval or disapproval. 

Sometimes, though rarely, the plan is contained in 
the agreement itself. When the plan is contained 
in the agreement, it was assented to by all when they 
became parties to the agreement. It need not be 
submitted to them again for their approval. 

The agreement sometimes leaves it to the commit- 
tee to put into operation such plan as it may, in 
its discretion, believe best. When the committee 
is given this discretionary power its plan is not sub- 
mitted to the parties, as they are bound, under the 



REORGANIZATION OF THE RAILROAD 361 

circumstances, by whatever plan the committee, in 
good faith and without any abuse of its power, may 
propose. 

But, no matter how uncontrolled a discretion may 
be given the committee, its acts are always subject 
to the supervision of the court. Be its powers ever 
so broad, the committee, at all times, must act in 
good faith toward the parties it represents, and must 
not abuse or misuse the powers conferred on it. 

However, the agreement may declare, and it 
usually does, that the committee shall submit its 
proposed plan to the parties for their consideration. 
It then provides for the manner in which the parties 
shall express their assents to or dissents from such 
plan. 

The manner in which assents or dissents shall be 
expressed is stated in the agreement. Some agree- 
ments say that the parties to the agreement wishing 
to object to the proposed plan shall file their dissents 
with the depositary. When dissents representing a 
certain proportion in amount of the deposited securi- 
ties have been thus filed, the plan shall be consid- 
ered rejected and, thereupon, another submitted. 
Should the requisite number of dissents not be filed, 
the plan is considered approved and binding on 
all. 

Some agreements provide for the withdrawal of 
those parties who do not wish to be bound by the pro- 
posed plan. These provisions are to the effect that 



362 RAILROAD BONDS AND NOTES 

those who do not approve of the proposed plan and 
desire to withdraw shall surrender their certificates 
of deposit to the depositary, and, upon paying the 
amounts charged against such securities, shall receive 
in return securities represented by such certificate of 
deposit and thereupon shall be deemed to have dis- 
sented from the plan and withdrawn from the agree- 
ment and are relieved from all liability in any 
further proceedings under it. 

On the other hand, the agreement may provide for 
the filing of assents with the depositary; and that 
those who do not file their assents shall be deemed to 
have objected to the plan. When the requisite 
amount of assents have been filed the plan is deemed 
approved ; should the requisite amount of assents not 
be filed, the plan fails to be approved and another 
is submitted. 

What shall constitute the requisite amount or pro- 
portion of assents or dissents, to approve or reject a 
plan, as the case may be, and the time within which 
they shall be filed, are fixed usually in the agreement, 
though it is sometimes left to the committee to de- 
termine. 

The rejection of the plan because the requisite 
amount or proportion of assents have not been filed, 
or because the specified amount or proportion of dis- 
sents have been filed, results in another plan being 
submitted. This course is more favored, in some 
cases, than that which permits the dissenting parties 



REORGANIZATION OF THE RAILROAD 363 

to withdraw their securities; for should large hold- 
ings be withdrawn, the resources of the committee 
may be reduced so as to materially interfere with, if 
not prevent, the purchase of the property and the 
carrying out of the reorganization. 

The committee gives notice by advertisements in 
the newspapers, or in such other manner as it may 
believe advisable, whether the plan is adopted or 
rejected. 

If it be necessary that written assents or dissents 
be filed they must be executed by those appearing 
as the registered owners of the certificates of deposit 
at die time the registration or transfer books of the 
depositary were closed for that purpose. Or the 
paper may be executed in the name of such registered 
owner by some one duly authorized. 

It is sometimes provided in the agreement that if 
the plan or the changed plan, as the case may be, be 
approved by a certain majority in amount of the cer- 
tificates of deposit, it shall be binding on all the par- 
ties to the agreement, notwithstanding that the 
minority objects. In the absence of such a provision 
the consent of the majority, no matter how large, 
cannot affect the rights of the minority and force 
upon the latter a plan which they do not approve. 
However, to avoid forcing the minority into a plan 
it does not approve and to allow it to withdraw 
under such circumstances, the provision is frequently 
inserted in reorganization agreements by which those 



364 RAILROAD BONDS AND NOTES 

who object to the plan or the changed plan, as the 
case may be, may withdraw from the agreement and 
no longer be bound by it. 

When the plan of the majority is carried out under 
such a provision in the agreement as just mentioned, 
against the objection of a minority, the court will see 
that there is no pretense of any fraud or oppression 
in what the majority propose doing and that the 
interests of the minority are protected. 

When plan takes effect; abandoning plan after 
adoption. 

Sometimes the agreement mentions when the plan 
shall become operative and take effect, but, as a gen- 
eral rule, this is left to the committee, in its dis- 
cretion, to decide. 

When the plan is made operative the committee 
gives notice of this fact by advertisement, or in such 
other manner as it may believe best. 

The committee decides also when it shall proceed 
to carry out the terms of the plan after it has become 
operative by approval of the parties or by the will of 
the committee. See Discretion of committee to 
adopt plan; submitting plan for assent or dissent. 
Page 360. 

Under the usual form of reorganization agree- 
ment, the powers of the committee with relation to 
carrying out the plan are very broad and quite gen- 
erally include the authority to abandon it, notwith- 



REORGANIZATION OF THE RAILROAD 365 

standing that it has been declared in operation. 
Should the committee abandon the plan, the parties 
to the agreement who have deposited are entitled to 
a return of the securities represented by their certifi- 
cates of deposit, and thereafter they occupy the same 
position as they did before they became parties to 
the agreement. As a condition of the return of the 
securities, the certificate of deposit representing 
them must be surrendered and the proportionate 
share of the expenses of the reorganization, charge- 
able against them, must be paid. 

Changes in the agreement or the plan; power of 
committee to make changes; uncontrolled 
power; limited to certain matters; material 
changes; submitting changes to parties; un- 
authorized changes; ratification or rejection; 
ratification by majority; changes by majority 
against objection of minority; provisions for 
majority control. 

Each party to the agreement is entitled to say 
whether or not he shall be bound by any changes in 
it or in the plan, unless he has conferred on the com- 
mittee or on the majority of the holders of the de- 
posited securities the power to speak for him in this 
regard and bind him by their acts. 

The committee is usually authorized by the agree- 
ment to supply such minor omissions and remedy 
such immaterial defects in the agreement or in the 



366 RAILROAD BONDS AND NOTES 

plan as in its absolute and uncontrolled discretion it 
may think proper and advisable. 

The power to make changes in the agreement or in 
the plan is delegated usually to the committee by the 
agreement. It is then a matter for inquiry as to the 
extent of the authority the agreement confers. The 
agreement may give the committee an uncontrolled 
and absolute discretion to make changes ; or its action 
may be limited to changes with relation to certain 
specified matters; or it may be limited to changes 
with regard to all matters which are immaterial or 
are not substantial; or its powers may be regulated 
otherwise. 

Usually agreements provide that substantial or 
material changes shall be submitted by the commit- 
tee to the parties for their approval or rejection. 
This must then be done. 

Some agreements empower the committee to de- 
cide whether or not the change is material or sub- 
stantial, and declare that its judgment or decision in 
this regard shall be final and conclusive and all the 
parties to the agreement shall be bound thereby. 
Such an authority is so broad and inclusive that the 
committee under it, in the absence of bad faith, may 
act almost without restriction. 

When the committee is required to submit pro- 
posed changes in the plan or in the agreement to the 
parties, it files the proposed changes with the de- 
positary, and the same course is then pursued to 



REORGANIZATION OF THE RAILROAD 367 

either reject or accept the changes as in the case of 
the original plan. See Submitting plan for assent or 
dissent. Page 360. 

Sometimes those not approving the changes in the 
plan or in the agreement are permitted by the agree- 
ment to withdraw; then those continuing carry out 
the reorganization. But as a large majority in 
amount of the holdings may be withdrawn and thus 
weaken and perhaps render ineffective the resources 
at the command of the committee, the more prudent 
method is often favored by which, should the pro- 
posed plan not be approved by the necessary amount, 
or should it be rejected by the filed dissents, that it 
shall be considered abandoned and another sub- 
mitted. Though under the arrangement whereby 
the parties to the agreement may withdraw their 
holdings should they object to the plan or the 
changes in the plan or in the agreement, it is some- 
times provided that the committee may withdraw 
any proposed plan or changes in the plan or in the 
agreement when it sees that too many of the parties 
are withdrawing; upon the committee thus retract- 
ing such proposed changes, the right of all remain- 
ing parties to withdraw immediately ceases. 

A majority has no power to bind a minority by a 
consent to the plan or to changes in the plan or in the 
agreement; nor has it the power to bind the minority 
by its ratification, acceptance, or confirmance of any 
unauthorized plan or unauthorized changes in the 



368 RAILROAD BONDS AND NOTES 

plan or in the agreement, unless the mortgage or the 
reorganization agreement specifically gives the ma- 
jority this right to bind the minority in these partic- 
ulars. 

The mortgage or the agreement may provide that 
a majority, or a majority of a specified amount, may 
consent to the plan submitted, or to the changes in 
the plan or in the agreement, and that their consent 
in these particulars shall be binding on all. The 
only obligation on the majority then is that it must 
act in good faith and without any fraud or oppres- 
sion. 

When a change is made in the agreement or in the 
plan by reason of the consent of the majority against 
the objections of the minority, such changes will be 
strictly construed and the court will regard the lan- 
guage employed as having only that meaning that is 
plainly expressed by its terms and will not extend 
it to cover by inference anything else. Should there 
be doubt as to whether or not the language of the 
agreement confers this power on the majority, the 
court, under these circumstances, when there is a 
reasonable opportunity to do so, will decide that it 
does not. 

Powers of the committee; defined by agreement; 
discretionary powers; positive instructions. 

The committee as a rule has such powers only as 
the agreement or the plan gives it. Reorganization 



REORGANIZATION OF THE RAILROAD 369 

agreements quite generally give the committee rather 
broad and all-inclusive powers. They usually au- 
thorize it to execute all writings and do all acts that 
may be found necessary in the course of the reorgan- 
ization proceedings to carry out the terms of the 
agreement or the plan. In fact some reorganization 
agreements go to the extent of conferring on the com- 
mittee any power or authority that it, in its uncon- 
trolled discretion, may think necessary to carry out 
the agreement, even though such power or authority 
be not expressed or contemplated in the agreement. 
When the committee is not given the power to act 
according to its best judgment and discretion, it 
often finds in the course of its work that it is ham- 
pered in meeting the many details presenting them- 
selves from time to time and requiring its attention. 
It would be impracticable to seek the advice of the 
parties to the agreement and to ask their permission 
to act in such minor matters. The men who are se- 
lected to act as a reorganization committee usually 
are men of standing and skilled in that kind of work ; 
the law, independent of any provision in the agree- 
ment to that effect, confers on the committee a 
reasonable discretion to act according to its best 
judgment in minor matters and details. However, 
agreements for reorganization usually provide for 
the power of the committee in minor matters and 
details, and, quite generally, go further than the law 
in this regard, and vest in the committee an absolute 



370 RAILROAD BONDS AND NOTES 

and uncontrolled discretion in carrying out all the 
terms of the agreement. 

However, no matter how broad and unlimited a 
discretion may be given the committee, it has no 
power to disregard any positive instructions that the 
agreements may contain. 

Committee may employ representatives. 

The committee has the authority to employ legal 
counsel, agents, or other representatives, necessary 
to carry out the reorganization. But it may not 
delegate to others the exercise of that executive con- 
trol and management to which the parties to the 
agreement are entitled to believe the committee will 
give their personal attention, unless the agreement 
permits it. Sometimes the agreement authorizes the 
committee to appoint managers, sub-committees, or 
other representatives, and to confer on them the same 
powers that it, the original committee, had should it 
deem it necessary or expedient; and it is usually 
further provided that the compensation and dis- 
bursements of such managers or sub-committees shall 
be charged against the property and the deposited 
securities, as an expense of the reorganization. 

Committee may construe, remedy, change, prepare, 
adopt, declare operative, abandon plan. 

Agreements for reorganization often authorize the 
committee to place its own construction upon the 



REORGANIZATION OF THE RAILROAD 371 

terms of the agreement and to say just what the lan- 
guage employed shall mean; and, further, that the 
construction the committee so places upon the terms 
of the agreement shall be final and binding on all the 
parties. 

Reorganization agreements also quite generally 
confer the power on the committee to supply any 
omissions or remedy any defects in the agreement or 
the plan that in its judgment it believes necessary to 
carry out the purposes of such agreement or plan. 
In thus construing the terms of the agreement, and in 
supplying omissions, and in curing defects, the com- 
mittee must act in good faith. 

The committee may be empowered by the agree- 
ment to make changes in the plan or in the agree- 
ment; or the agreement may declare such changes 
may be made only on the approval of the parties 
themselves. 

The agreement usually grants to the committee 
the authority to prepare a plan for reorganization or 
to approve and to adopt a plan though not prepared 
by it. That it shall then submit such plan, whether 
prepared or approved or adopted by it, to the parties 
for their approval or disapproval; and, sometimes, 
the agreement lets it to the committee to decide when 
sufficient assents to the plan have been filed to ap- 
prove it, and when the necessary dissents have been 
filed to disapprove it. The agreement may also give 
the committee the authority to limit the period or 



372 RAILROAD BONDS AND NOTES 

extend the time within which the parties to the agree- 
ment shall assent to or dissent from the plan sub- 
mitted by it. Some agreements provide that all the 
parties to it shall be bound by any plan that the com- 
mittee shall submit; in such case the only limitation 
on the committee is that it shall act in good faith. 

It is left to the committee usually to declare when 
the plan shall become operative and go into effect, 
and when it shall proceed to carry out its terms. 

The committee is sometimes given the power to 
declare the plan abandoned even after it has declared 
it operative. 

Allowing parties to join in the reorganization; co- 
operation with other committees. 

Agreements sometimes give the authority to the 
committee to permit the stockholders and different 
aggregations of creditors of the insolvent road to 
join in the reorganization proceedings, should it 
deem it advisable, and to fix the terms upon which 
they shall become parties. 

As a general rule, reorganization agreements give 
the committee the power to limit the period within 
which the bonds or other securities may be deposited, 
together with the further power to extend such time 
and to impose a penalty as a condition of receiving 
them after the original period has expired. 

When the reorganization may be conducted ad- 
visedly in conjunction with another, proposed by 



REORGANIZATION OF THE RAILROAD 373 

other persons interested in other parts of the insol- 
vent road, or with the holders of other securities or 
obligations of the company interested in the same 
part, the committee is usually empowered by the 
agreement to participate in and cooperate with such 
other proceedings. 

Power of the committee over deposited bonds. 

With relation to the deposited securities, agree- 
ments for reorganization customarily confer on the 
committee the authority to collect and receive all 
sums due on them, and to act with relation to them 
as if it were the owner, subject, however, to the terms 
of the agreement. The committee may attend meet- 
ings of the holders of the bonds under that issue and 
may vote on such deposited bonds, stocks and other 
securities. 

The agreement invariably authorizes the commit- 
tee to use the deposited bonds in whole or in part pay- 
ment of the purchase price of the property of the 
road to be bought for the purposes of the reorganiza- 
tion, or to pledge them to procure the funds to pay 
such purchase price. 

It is also usual that the committee shall have the 
power to pay off or to satisfy claims entitled to prior 
payment and secured by prior liens against the prop- 
erty of the insolvent road that it has purchased at 
the foreclosure sale or otherwise acquired, if in its 
opinion it will protect the deposited bonds and be 



374 RAILROAD BONDS AND NOTES 

to the best interests of the parties to the reorganiza- 
tion. 

Pursuing the remedies of the bondholders. 

All litigation necessary to protect the rights and 
remedies of the holders of the deposited securities, 
which such holders might have conducted but for the 
reorganization, may be carried on by the committee. 
The committee, generally speaking, stands as the 
owner of the deposited securities. The committee, 
under the usual form of agreement, has the authority 
to request the trustee to pursue all remedies and to 
institute or to defend any legal proceedings or ac- 
tions necessary to enforce payment of the deposited 
bonds; should it believe it advisable for the protec-' 
tion of the parties to the agreement. 

Committee may acquire property; its powers with 
respect to same. 

Under the usual form of agreement the committee 
may take such steps as it believes necessary to pur* 
chase or to acquire the property of the insolvent road 
for the purpose of carrying out the objects of the re- 
organization or the plan, and may deal with the 
property so acquired as if it were the actual owner; 
but the agreement usually provides that the com- 
mittee shall not be bound to make such purchase 
merely because it is authorized to do so. 

The agreement also usually empowers the commit- 



REORGANIZATION OF THE RAILROAD 375 

tee to sell any or all property acquired, in such man- 
ner and at such prices as in its discretion it thinks 
best, if it believe it advisable in the course of the 
reorganization. 

The committee is also quite generally authorized 
to pay off any bonds or notes, or other obligations of 
the insolvent company, that are secured by property 
or by collateral, the acquisition of which property or 
collateral the committee may deem advantageous or 
advisable for the purposes of the reorganization. 
And it may use the deposited securities to make such 
payments or may pledge them to raise the money nec- 
essary therefor. 

Expenditures and debts by committee; expenses; 
may consent to- receiver's certificates. 

Reorganization agreements also quite generally 
confer on the committee the power to make necessary 
expenditures, to borrow money, and to incur such 
debts as in its discretion it thinks necessary to carry 
out the reorganization or to protect the interests of 
the parties to the agreement, and to pledge the de- 
posited bonds and all property it may have acquired 
to secure the payment of the debts so incurred, in- 
cluding its own expenses and compensation. This 
includes also the compensation and disbursements of 
the managers, subcommittees and other representa- 
tives, that it may have properly employed. 

Though the authority to do so may not be granted 



376 RAILROAD BONDS AND NOTES 

specifically, yet under some of the powers granted to 
the committee the power may be inferred and, ac- 
cordingly, it may join in and assent to an applica- 
tion by the receiver for the issuance of receiver's cer- 
tificates, which under the order of the court may be 
given a priority in payment over the bonds and other 
securities deposited under the reorganization agree- 
ment. 

Personnel of the committee. 

The agreement usually empowers the committee 
to fill any vacancies in its membership; and some- 
times to add to its numbers such additional members 
as it may deem necessary. Sometimes the commit- 
tee reserves to itself the right to withdraw at any 
time upon giving due notice to the depositing security 
holders. Under these circumstances the depositing 
security holders are entitled to the return of securi- 
ties represented by their certificates of deposit, upon 
paying their proportionate shares of the expenses in- 
curred and any sum that may have been advanced to 
them with interest thereon. 

Individual interest of the committee. 

Reorganization agreements quite generally provide 
that any member of the committee and any firm or 
corporation of which the committee or any of its 
number may be a member or officer, may become 
pecuniarily interested in the property or in the securi- 



REORGANIZATION OF THE RAILROAD 377 

ties that may be involved in the agreement or the 
plan or be acquired under them. 

Duties of the committee ; good faith ; will of major- 
ity ; accounting ; time within which to complete 
reorganization; five years' provision. 

Generally speaking, the committee is charged with 
the duty of carrying out the terms of the agreement 
and the plan. It should be remembered, however, 
that under the usual form of agreement, the commit- 
tee may withdraw at any time and may abandon the 
agreement and the plan, though it has declared the 
latter operative and in effect. But in carrying out 
any work that it has undertaken it is accountable for 
its actions. 

The committee must act at all times in good faith. 

The duties which the committee assumes it owes to 
each party to the agreement. It acts for all the par- 
ties and not for a majority, no matter how large, 
unless the agreement provides that the will of the 
majority shall prevail with relation to the matter in 
question. 

The committee, therefore, has no power to disre- 
gard any positive instructions contained in the agree- 
ment at the request of the majority. Each party 
may insist that the committee fully perform its du- 
ties according to the terms of the agreement; and 
should he suffer a pecuniary loss by reason of any 
wrongdoing by the committee, he is entitled to sue 



378 RAILROAD BONDS AND NOTES 

and recover damages from the committee personally, 
unless the act be one for which the agreement or the 
law declares the committee shall not be liable. 

When the committee has carried out the reorgan- 
ization, or if the proceedings have been terminated 
sooner, it must file with the depositary an accounting 
of its receipts and disbursements. The agreement 
usually provides that upon filing this accounting, the 
committee shall be discharged from further liability 
with respect to the agreement or the plan. See Ac- 
counting and dis charge. Page 382. 

The manner of and the time for the performance 
of many of the duties of the committee are left 
largely, as was seen, to its discretion. The time 
within which it shall submit a plan is left also to its 
discretion. 

The period within which it shall carry out the 
terms of the agreement and the plan, and otherwise 
perfect the reorganization, and deliver to the parties 
the securities of the new corporation or return the de- 
posited securities, is left usually to its discretion; 
though most agreements ^^ such period at ^v^ years 
in order to comply with the rules of the Committee 
on Stock List of the New York Stock Exchange. It 
is usually contemplated by the parties that the reor- 
ganization shall be completed within a shorter pe- 
riod. 

While the committee may not be limited as to the 
time within which it shall complete the reorganiza- 



REORGANIZATION OF THE RAILROAD 379 

tion, should it neglect its duties and not proceed for 
an unreasonable time, the court may declare the 
agreement abandoned and relieve the parties from 
any further obligations under it. 

Personal liability of the committee; money dam- 
ages; injunction; compelling performance of 
duties ; declaring acts void ; error of judgment ; 
limitation of liability; who affected by limita- 
tion; liability to third persons; liability for acts 
of co-members ; accounting and discharge. 

The committee is liable, ordinarily, to any party 
to the agreement who suffers a pecuniary loss by 
reason of its wrongdoing in carrying out the reorgan- 
ization, or with relation to any of the matters con- 
tained in the agreement. The liability of the com- 
mittee in favor of the parties to the agreement is not 
charged against the property in its custody, as this 
liability is a personal one. 

The law awards any party to the agreement who 
has suffered a financial loss, by reason of the wrong- 
ful acts of the committee, damages in money to com- 
pensate him for such loss ; and the court may stop, by 
injunction, any wrongful act the committee threat- 
ens to do. Should the committee have carried out 
the wrongful act, the court may, under proper cir- 
cumstances, set it aside and declare it void and of no 
effect. 

As was seen, the committee is often vested, in 



38o RAILROAD BONDS AND NOTES 

many matters, with discretion and justified in such 
cases in acting according to its best judgment. An 
error of judgment where there is no bad faith will 
not subject the committee to any liability even 
though it may have caused damage. 

Reorganization agreements, however, usually 
grant the committee a certain protection and im- 
munity from liability by declaring that neither the 
committee nor any of its members shall be liable to 
any of the parties to the agreement for any act or 
omission to act of any of its representatives, provided 
it has selected these representatives in good faith. 
Its only duty with respect to its representatives is 
that it shall use reasonable care in selecting them; if 
the committee has done that, according to these pro- 
visions, it is not liable for any wrong act of its repre- 
sentatives. The agreements also, as an invariable 
rule, provide that the committee shall not be liable 
for anything other than its own wilful wrongdoing 
or gross negligence. It seems, too, from the trend 
of decisions that the courts hold the members of a 
reorganization committee personally liable only for 
its own gross negligence or wilful wrong, even where 
the agreements do not make such a provision. 

The committee, as a rule, by these provisions in 
the agreement, seeks to avoid personal liability as it 
feels that it is acting for the protection and benefit 
of all the parties to the agreement; hence these pro- 



REORGANIZATION OF THE RAILROAD 381 

visions that exempt it from personal liability in all 
cases except where it has itself done wrong wilfully 
or is grossly careless. 

Notwithstanding any provisions in the agreement 
by which the parties to it (the committee, the de- 
positary, and the depositors of the securities) may 
agree to limit the liability of the committee as to 
themselves, it remains liable under the ordinary rules 
of law to all third persons to whom it may cause 
any damage; for such third persons are not bound 
by agreements to which they are not parties. These 
limitations of the liability of the committee can 
affect only those who are parties to it and relieves 
the committee only in its relations with such parties. 

Should the committee in the course of carrying out 
the reorganization or the plan become liable to third 
persons on an official contract, or by reason of some 
official act or negligence in carrying out an official 
act, its liability is in its representative capacity as a 
committee. The damages in such a case are regarded 
as an expense of the reorganization and are paid out 
of the property the committee has acquired under the 
reorganization agreement, including the deposited se- 
curities. 

Ordinarily, in cases of co-trusteeship — which re- 
lation the members of the reorganization committee 
bear to each other — one trustee is not liable for the 
acts of the other, except in those cases where with 



382 RAILROAD BONDS AND NOTES 

knowledge of the facts he stands by without protest 
and permits his associate to do wrong. This seem- 
ing acquiescence in the wrong act and failure to ob- 
ject renders him as legally liable as if he had actually 
participated. And even though he be ignorant of 
the acts of his wrong-doing associate, if the circum- 
stances be such that he should have known what was 
going on, he is negligent in not knowing, and he is 
charged with the same knowledge and liability as if 
he were actually cognizant of the act complained of 
and permitted it to be done without protest. How- 
ever, most agreements provide that one member of 
the committee shall not be liable for the acts of any 
other member. 

It is the duty of the committee to render an ac- 
counting of its acts while in office. Reorganization 
agreements usually provide that when the committee 
has filed such an accounting with the depositary, or 
has returned to the parties to the agreement the se- 
curities they have deposited under it and represented 
by their certificates of deposit, or has delivered to 
them the securities of the new corporation to which 
they are entitled, then all duties and liabilities of the 
committee to the parties to the agreement shall cease. 
But any of the parties are entitled to have the acts of 
the committee and its accounting reviewed by the 
court should there exist legal ground therefor, such 
as fraud, or other evidence of bad faith. 



REORGANIZATION OF THE RAILROAD 383 

Purchase of property of insolvent road by bond- 
holders or committee ; using bonds in pa5mient ; 
payment of costs in cash; when purchased by 
others; committee using own money; failure 
to complete purchase; deficiency on resale. 

Experience has shown that a fair price can be ob- 
tained and a sacrifice avoided in the sale of the prop- 
erty of the insolvent road at foreclosure only by the 
bondholders under the foreclosed mortgage using 
their bonds in bulk to make the purchase. Accord- 
ingly, the bondholders under the foreclosed mort- 
gage, or the reorganization committee representing 
them, are permitted to pay their bid in whole or in 
part with their bonds and the balance, if any, in cash. 

The bondholders under the foreclosed mortgage 
are thus permitted to use their bonds in the purchase 
because the proceeds of the foreclosure eventually 
will come to them in money. 

Each bond is accepted for such sum as it is entitled 
to receive as its proportionate share of the proceeds 
of the sale. Each bond is accepted for such an 
amount as it would receive upon a final distribution. 

However, this payment of the bid by the bond- 
holders, or their committee, with bonds secured by 
the foreclosed mortgage, is usually subject to the con- 
dition that the costs and charges of the litigation and 
of the trusteeship and the expenses of the sale shall 
be paid in cash. 



384 RAILROAD BONDS AND NOTES 

The court in ordering the foreclosure sale may, in 
its decree, declare that should the purchaser not be 
a bondholder under the foreclosed mortgage, he shall 
pay at once, in cash, part of his bid as a deposit or 
earnest money. 

Should some of the parties to the agreement not 
pay their proportionate shares of the assessments or 
charges levied by the committee in order to make the 
purchase, and the committee, with money that it has 
furnished itself, completes the purchase, the court 
will hold that it has not acquired the property as in- 
dividuals but that such committee holds it in trust 
for and as the representatives of those who have com- 
plied with the terms of the agreement and have con- 
tributed their pro rata shares. For such sums as the 
committee has advanced, it is entitled to be reim- 
bursed from those who have accepted its purchase, 
and the property purchased is charged with the pay- 
ment of such moneys so advanced before the bond- 
holders receive anything therefrom. 

Should the bondholders or the committee, as the 
case may be, conclude that the price bid at the fore- 
closure sale was too high and that it would not be 
advisable to take over the property and operate it at 
that figure, the property is sold again, under the 
order of the court, and if on the resale it should bring 
less, then the parties to the agreement may be held 
liable for the deficiency. They are not entitled 
ordinarily to the return of the deposit made. 



REORGANIZATION OF THE RAILROAD 38^ 

Parties to the agreement are bound by all proper 
acts of the committee; rule when committee 
acts wrongfully; ratification of unauthorized 
acts; remedies for wrongful acts. 

The parties to the agreement are bound by all acts 
of the committee when acting within the scope of its 
authority in carrying out the terms of the agreement 
or the plan. They are not bound, however, when 
the committee acts fraudulently nor when it acts in 
violation or in excess of its authority. 

Should the parties to the agreement ratify, con- 
firm, adopt, or accept, by word or conduct, any unau- 
thorized action of the committee, they are bound by 
it with the same effect as if the act had been author- 
ized before it was done. To reject an unauthorized 
act of the committee, the party must proceed to do 
so without delay after becoming acquainted with the 
facts. A failure to act promptly under those circum- 
stances may be construed as an acquiescence in the 
act complained of, and an acceptance of it. Silence 
for an unreasonable period after learning of the un- 
authorized action may be construed as a consent to it. 

Should the committee threaten to carry into effect 
an act that is tainted with fraud or which is in viola- 
tion or in excess of its authority, the court may stop 
it by injunction; or if the act has already been carried 
out, the court may declare it void and set it aside and 
order such restitution and attempt to place the par- 
ties in or as near to their original positions as they 



386 RAILROAD BONDS AND NOTES 

occupied before the transaction was consummated, 
as the circumstances of the case permit. 

Parties to the agreement bound by its terms; must 
deposit bonds; must pay share of expenses, 
etc. ; when such expenses are not paid ; parties 
avoiding liabiHty under agreement; abandon- 
ment. 

Each party to the agreement is usually bound by 
all its terms and is entitled to all its benefits. Ac- 
cordingly, when so bound, he must comply with all 
its requirements as to the deposit or delivery of his 
bonds (if a bondholder) and shall, when requested 
by the committee, execute such necessary transfers, 
powers of attorney, or other documents as the com- 
mittee reasonably may require to enable it to use the 
deposited bonds according to the terms of the reor- 
ganization agreement or the plan. 

Each party to the agreement must pay his share of 
the expenses of the reorganization, which includes the 
compensation of the committee and such other assess- 
ments as the agreement or the plan shall specify. 

Should the parties to the agreement fail to pay their 
proportion of the expenses of the reorganization, the 
committee is entitled to withdraw and refuse to pro- 
ceed. Should the property of the insolvent road have 
already been purchased, the court will order it sold 
again and any deficiency on the resale will be charged 
against the parties to the agreement proportionately. 



REORGANIZATION OF THE RAILROAD 387 

As the agreement for reorganization is a contract, 
each party to it is bound by all its terms and must do 
all that it declares he shall. He can only avoid lia- 
bility by showing that he was induced illegally to be- 
come a party to it, as by fraud; or he may be relieved 
from further liability by withdrawing from the 
agreement when the agreement itself permits this. 

Should the committee abandon the reorganization, 
it relieves the other parties to it from further liabil- 
ity under it. They then stand upon their original 
rights and each is entitled to his proportionate share 
of the proceeds of the sale of the property covered by 
his mortgage. 

The abandonment of the reorganization by the 
committee or the withdrawal from it by the parties 
relieves the latter from further liability from that 
time on; but as to obligations already incurred before 
the committee abandoned the reorganization or 
before his withdrawal, each party continues liable. 

Should the committee abandon the reorganization, 
the court may, under some circumstances, declare 
that it has lost its right to compensation. 

Withdrawing from the agreement; surrender of 
certificates ; payment of expenses and charges ; 
return of securities; limitation of time. 

It was just seen that each party is usually bound 
by the terms of the agreement and usually may not 
avoid his responsibility under it and withdraw, unless 



388 RAILROAD BONDS AND NOTES 

the agreement specifically provides that he may do so. 
In making a provision of this kind the agreement, at 
the same time, regulates such withdrawal. Agree- 
ments for reorganization usually do provide for cir- 
cumstances and conditions that may arise when it 
would not be fair to ask the parties to proceed further 
should they not be in harmony with the course being 
then pursued; and therefore, they contain provisions 
under which such parties are given an opportunity to 
withdraw. This is usually when the plan is sub- 
mitted and not approved by them, or the agreement 
or the plan is changed against the objections of such 
parties. If the committee is not bound, the deposi- 
tors are not, and may withdraw without permission. 
The privilege to withdraw from the reorganiza- 
tion is granted only upon the condition that the party 
withdrawing shall surrender his certificate of deposit 
to the depositary, endorsed in blank, and with such 
other assignments, transfers, or powers, as may be 
required, and thereupon he shall receive in return the 
securities represented by his certificate ; and also that 
he shall pay such sums as may be charged against 
the securities represented by that certificate. These 
charges are usually the amount, with interest, of any 
interest that may have been advanced by the commit- 
tee on the securities to be withdrawn and such sums 
as the committee may fix as a fair pro rata contribu- 
tion toward the expenses of the reorganization and 
its own compensation. The committee is entitled to 



REORGANIZATION OF THE RAILROAD 389 

require as a further condition of withdrawal that the 
party withdrawing shall pay its proportionate share 
of any moneys the committee may have advanced in 
the course of the reorganization for purposes other 
than its own expenses and compensation. 

The committee may also require that the with- 
drawing party shall pay his proportionate share of 
such sums as the committee may require to be held by 
the depositary to indemnify it (the committee) 
against any obligation it may have incurred in the 
course of the reorganization. The amount of this 
sum is fixed by the committee; but it is usually pro- 
vided that it shall not exceed one per centum of the 
face amount of each bond, or note, or other obliga- 
tion. 

The withdrawing party, when paying his propor- 
tionate share of the moneys paid out by the commit- 
tee or as indemnity against obligations incurred by 
it, is given a certificate or other written evidence of 
his share or interest in those moneys. This certifi- 
cate is in such form as the committee shall prescribe. 
Should it eventually transpire that the amount so 
withheld is not necessary or more than necessary the 
party depositing or advancing it is entitled to its 
return or to his proportionate share of the excess. 

Upon paying all charges against his securities and 
surrendering his certificate of deposit, securities rep- 
resented by such certificate of deposit are returned to 
the withdrawing party and he is regarded as having 



390 RAILROAD BONDS AND NOTES 

withdrawn from the agreement and the reorganiza- 
tion proceedings, and is no longer bound by them, 
nor entitled to any of their benefits. 

The time within which a party may withdraw 
from an agreement for reorganization is usually lim- 
ited in the agreement itself. Should he not with- 
draw within the specified time, he is presumed to 
have consented to the plan or to the changes in the 
agreement or the plan, and is bound by their terms as 
so changed. He has then lost the right to withdraw. 

It is sometimes provided that the committee may 
withdraw a proposed plan, or changes to a plan or 
agreemicnt, when it sees that too many of the parties 
are objecting and withdrawing. When the commit- 
tee withdraws the plan or the changes in the plan or 
in the agreement, the rights of the parties to the 
agreement to withdraw from it immediately cease. 
Those who have not availed themselves of the privi- 
lege have lost it unless it be given again with relation 
to some other plan or changes. 

Termination of the agreement; by completing re- 
organization ; committee may terminate ; court 
may declare agreement abandoned; rights of 
parties when terminated by court or com- 
mittee. 

When the reorganization has been carried out the 
agreement is terminated because it has been fully 
performed and there is nothing further to do. 



REORGANIZATION OF THE RAILROAD 391 

However, at any intermediate stage of the reor- 
ganization, the committee is quite generally em- 
powered by the agreement to terminate it whenever 
it shall consider such a course best or advisable. In 
the absence of such a power in the committee, the 
agreement must continue in force until it is per- 
formed and the reorganization carried out; or until 
it is declared abandoned by the court; or all the par- 
ties by mutual consent dissolve the agreement and 
adjust matters to their mutual satisfaction among 
themselves. 

Should the committee abandon its task, it relieves 
the other parties to the agreement from performing 
their obligations, and they may ask the court to de- 
clare the agreement abandoned and terminated. 

Should the committee, under its power to do so, 
declare the agreement terminated, or should the court 
so declare it, the parties are relieved from further 
obligation under it; and they should then be put in 
the positions they were in before the reorganization 
was commenced, so far as the condition of affairs and 
the situation of the parties and the property permits. 
Accordingly, parties who have deposited their securi- 
ties may surrender their certificates of deposit to the 
depositary and receive in return the securities repre- 
sented by these certificates, upon complying with the 
terms imposed by the court or the committee, as the 
case may be. These terms usually are that the per- 
son withdrawing his securities shall return the 



392 RAILROAD BONDS AND NOTES 

amount (with interest) that may have been ad- 
vanced by the committee as interest upon the securi- 
ties he withdraws ; and that he shall pay his propor- 
tionate share of the expenses of the committee; and 
the committee may also require that the party pay 
at that time his proportionate share of such sums as 
the committee may have expended in the course of 
the reorganization, for purposes other than its 
expenses and compensation, such as discharging 
prior liens or other payments of like nature necessary 
or deemed advisable to protect the securities de- 
posited; and too, the withdrawing party shall pay 
such sums as the committee shall require to be held 
by the depositary to indemnify it (the committee) 
against any obligation it may have incurred under 
the agreement. 

Should the committee have abandoned the agree- 
ment unreasonably, or should it have acted wilfully 
neglectful, the court may declare that it has for- 
feited its right to compensation, should the situation 
justify such a decision. 

Upon making payments of sums other than the 
return of interest and the expenses and compensation 
of the committee, the party receives a certificate or 
other writing or evidence of such moneys so deposited 
and advanced. Should the amount so held be event- 
ually found not to be necessary or to be more than is 
necessary, the party so advancing or depositing this 



REORGANIZATION OF THE RAILROAD 393 

sum is entitled to its return or to the return of his 
proportionate share of the excess, as the case may 
be. 

Expenses of reorganization; charged against de- 
posited securities; payment as condition of 
right to receive securities of new corporation. 

The parties to the agreement in whose behalf the 
committee acts must defray the expenses of the reor- 
ganization. Such expenses include the compensa- 
tion of the committee, proper fees for legal counsel, 
and other necessary outlays incurred in the course of 
carrying out their duties ; including the compensation 
and disbursements of such managers, sub-commit- 
tees, or other representatives that may have been 
properly employed or appointed. Any loss the com- 
mittee or depositary may suffer in carrying out the 
reorganization are properly charged as expenses, 
where such loss was not caused by bad faith. 

It is proper that the agreement should provide the 
manner for meeting these expenses. The parties to 
the agreement are bound by any provision for the 
expenses of the reorganization that the agreement or 
the plan may contain. 

Should the agreement or the plan not provide for 
the payment of the expenses of the committee or of 
the reorganization, the law declares that each party 
participating shall pay his proportionate share. The 



394 RAILROAD BONDS AND NOTES 

agreements or the plans usually make provisions to 
the same effect. See Withdrawing from agreement; 
payment of expenses and charges. Page 387. 

The parties to the agreement are not entitled to 
their stock or other securities in the new corporation 
until they pay their proportionate share of the ex- 
penses of the reorganization and of such other 
moneys as are properly charged against them. 

The new corporation ; distinct legal body from old 
corporation ; succeeding to franchises ; name of 
new corporation; distinction between fran- 
chises to operate and franchise to exist as a 
corporation. 

The new corporation, organized by the committee 
or the other purchasers at the foreclosure sale, is a 
separate and distinct legal body from the old insol- 
vent road. Sometimes the reorganization is per- 
fected without selling the property of the road at 
foreclosure, but by a general readjustment of its 
affairs; then the old corporation continues in opera- 
tion and no new one is formed. 

It has been held that the purchaser at the fore- 
closure sale of an insolvent railroad need not incor- 
porate to operate the road. An individual may pur- 
chase the road and operate it as an individual, or 
may transfer it to others. The universal rule, how- 
ever, is for the purchasers at the foreclosure sale to 
incorporate or to convey the property to a corporation 



REORGANIZATION OF THE RAILROAD 395 

purposely formed to take over the property and 
operate the road. 

Should the franchise to operate the road be in- 
cluded in the sale, as it quite generally is, the new 
corporation succeeds to all the powers and the rights 
that the old corporation had to operate the road. In 
succeeding to these franchises and powers and rights, 
the new corporation must assume the public obliga- 
tions that the old corporation was charged with, and 
must maintain and keep the railroad in operation as 
a public highway for the transportation of persons 
and property and must carry out all regulations im- 
posed by the State or governmental commissions with 
relation to the exercise of such franchises. 

The new corporation may use the name of the old 
one, unless some law forbids it. However, the fact 
that the old corporation has been stripped of all its 
property by the foreclosure does not affect its con- 
tinued existence as a corporation, unless the law of 
the State under which it was organized declares that 
the sale of its property at foreclosure shall dissolve 
the corporation. In the absence of such a statute, 
the old insolvent corporation continues and under its 
old name. While the old corporation may thus con- 
tinue, it does so usually for the purposes only of 
winding up its affairs ; it has no power any longer to 
operate the road, as its franchises to do so have been 
sold and are now held by the new corporation. 

In those cases where the old corporation continues 



396 RAILROAD BONDS AND NOTES 

and uses its name, the new corporation takes a name 
similar, substituting usually only the word "rail- 
way" for "railroad," or vice versa. 

It may be opportune to call attention again to the 
distinction between the franchise to operate the rail- 
road and the franchise to exist as a corporation. 
The old corporation continues in existence notwith- 
standing that all its property has been sold; it con- 
tinues in existence until it has been legally dissolved 
by a proceeding instituted by the Attorney General 
acting for the sovereign power, the State, that cre- 
ated it. 

The only power that can take away the life of a 
corporation is the power that gave it, i. e., the State. 
The right to be a corporation is acquired by compli- 
ance with certain formal requirements of statutes. 
The statutes of some States declare that the pur- 
chaser at the foreclosure sale need not comply with 
these formal requirements but shall become a corpo- 
ration by reason of such purchase. The new cor- 
poration is created therefore either by formal in- 
corporation or by reason of the purchase at the 
foreclosure sale. 

If the franchise to operate is not included in the 
sale or does not pass to the purchaser for any reason, 
then the mere physical property only passes to the 
new corporation without the right to operate it as a 
railroad. Should the franchise to operate be in- 
cluded in the sale and pass to the new corporation. 



REORGANIZATION OF THE RAILROAD 397 

it is owned and used by it the same as any other 
property. This new corporation then holds the 
property purchased at the foreclosure sale and with 
it also possesses the right to operate it as a railroad. 
It is then in a position to do business with this prop- 
erty so acquired, including the right to operate it, 
and, accordingly, proceeds to do business with such 
moneys as it may raise by one or m_ore of the usual 
methods, i. e., by assessing the parties to the reorgan- 
ization, by sale of its stock, bonds, notes, or other 
securities, and such credit as may be given it. 

New corporation bound to issue stock, bonds, etc., 
according to agreement and plan; rights of 
parties to agreement to securities of new cor- 
poration; when such securities must issue; 
five years' rule ; voting trust. 

The new corporation is bound to issue to the par- 
ties to the agreement such stock, bonds or other 
securities as the agreement or the plan declares it 
shall. And the court will compel it to carry out 
completely the terms of the agreement or the plan 
in this regard. True, the new corporation never 
signed the agreement nor was it a party to it or to the 
plan that is sought to be enforced against it. It 
was not in existence at that time. But it came into 
existence as a result of the agreement and the plan.- 
The law, accordingly, will read the agreement and 
the plan for reorganization into the charter of the 



398 RAILROAD BONDS AND NOTES 

new corporation and compel it to enforce its pro- 
visions in this respect. 

Should the reorganization have been carried out 
by the bondholders under the foreclosed mortgage 
alone, and the plan contemplates the distribution of 
the capital stock of the new corporation among them 
alone, each is entitled to receive his proportionate 
share of the stock issued. The stock of the new cor- 
poration when issued to them represents their owner- 
ship in the property that their bonds purchased. 

Should the new corporation be capitalized for 
more than the amount for which the property was 
purchased at the foreclosure sale, with the object of 
raising money by the sale of the additional stock, 
then the share of the participating bondholder is con- 
fined to his proportionate share of the capital stock 
that represents the amount paid at the sale. 

Bondholders do not always receive stock to repre- 
sent their interests in the new corporation. Under 
some plans of reorganization they receive in ex- 
change for their bonds, or their interest in the prop- 
erty purchased at the foreclosure, other bonds or 
notes of the new corporation. This is when stock- 
holders of the old corporation join with the bond- 
holders in the reorganization. Then the stockhold- 
ers receive the stock of the new corporation upon 
paying in cash for it. The bondholders may also 
take stock in payment in whole or part of their 
bonds. Each reorganization depends upon the situa- 



REORGANIZATION OF THE RAILROAD 399 

tion that confronts the committee, and each plan is 
made with the object of putting the new corporation 
upon a financial basis that will enable it to operate 
profitably, and at the same time satisfy, so far as the 
situation permits, all the persons and interests par- 
ticipating in the reorganization. 

The agreement or the plan may designate the time 
within which the reorganization shall be completed 
and the stock or other securities of the new corpora- 
tion shall be issued and distributed to the parties 
entitled to them. It is quite common for the agree- 
ment or the plan to limit the period to five years 
within which the reorganization shall be perfected 
and the securities of the new corporation distributed 
or the deposited securities returned. This is done 
to comply with the rule of the Committee on Stock 
List of the New York Stock Exchange. 

The reorganization agreement may create a voting 
trust by which the committee or others are appointed 
voting trustees for a specified period; in some States 
limited to five years. By this accumulation of the 
voting rights into the hands of the voting trustees, on 
the bonds deposited and on the securities of the new 
corporation, the power to control the affairs of the 
reorganization and the policies of the new corpora- 
tion is concentrated. While such voting trust is in 
force the bondholders have no vote on their deposited 
or new securities, but are bound by the vote of their 
voting trustees, when the latter act within the scope 



400 RAILROAD BONDS AND NOTES 

of the powers conferred on them. Such voting trust, 
among other powers, may confer on such voting trus- 
tees the power to determine when the capital stock, 
bonds, or other securities of the new corporation shall 
be issued and distributed. 

New corporation may take property free from all 
liens against it ; may take subject to such liens ; 
or some of them ; other debts and contracts of 
the old corporation. 

Whether or not the new corporation shall take the 
property of the insolvent road purchased at the fore- 
closure sale, or otherwise acquired, free from the 
mortgages or other liens against it having priority 
over the mortgage that was foreclosed, depends upon 
the order of the court ordering the property sold. 

This decree, or order of the court, may direct that 
the property shall be sold subject to all mortgages or 
other liens having priority over the foreclosed mort- 
gage. In such case the new corporation that pur- 
chases this property must pay these prior mortgages 
or other liens, so far as such property against which 
they are charged will do so. It has no liability for 
these payments beyond the value of the property 
against which they are charged. However, should 
the new corporation expressly assume certain debts 
as part of the purchase price, it must pay such debts 
without regard to the value of the property it takes 
over. By thus assuming a debt as part of the pur- 



REORGANIZATION OF THE RAILROAD 401 

chase price, the new corporation makes it its own 
obligation. 

The decree of the court may order that the prop- 
erty be sold free from such prior mortgages or other 
liens and that they be charged against the proceeds 
of the sale. These respective liens in this way are 
transferred from the property to the proceeds. The 
new corporation then takes the property free and 
clear of such mortgages, other liens and claims. Of 
course the purchase price in each case is different. 
When sold subject to prior mortgages and other liens 
only the equity in the property is actually paid. 
When sold free and clear of such prior mortgages 
and other liens, then the full purchase price is actu- 
ally sold. By equity is meant, in the instance under 
discussion, what is left after the amount of all the 
prior mortgages and other liens are deducted from 
the value of the property in question. 

In the absence of any understanding to the con- 
trary the purchaser at the foreclosure sale takes the 
property free from all interests or claims of the in- 
solvent railroad company itself, its stockholders, its 
unsecured or general creditors, and also of its cred- 
itors who were secured by mortgage or other liens 
that attached to the property later in point of time 
than that of the foreclosed mortgage. As to all these 
the foreclosure cuts off their rights in the property. 
As to those whose mortgages or other liens have pri- 
ority over the foreclosed mortgage, the foreclosure 



402 RAILROAD BONDS AND NOTES 

does not affect their rights in any way. They are 
entitled to be paid in full out of the property against 
which they are charged or out of its proceeds, accord- 
ing to their respective ranks and priorities, before the 
bonds under the foreclosed mortgage receive any- 
thing. Therefore the decree of the court provides 
for them by either continuing their liens against the 
property in the hands of the purchaser or by selling 
the property free from their liens and transferring 
such liens against the proceeds of sale. 

Contracts made by the old corporation are not 
binding on the new corporation and it is in no way 
affected by them. But should the reorganization be 
carried out so that no new corporation is formed but 
the old company is continued in a readjusted form, 
then the contracts that it previously made continue 
against it, as there is no change in its corporate exist- 
ence. 

However, should the new corporation adopt a con- 
tract made by the old corporation, or accept any ben- 
efits under it and thus adopt it, it becomes liable 
on it. 

New corporation not liable for contracts or debts 
of the receiver ; exceptions. 

The new corporation takes the property and fran- 
chises purchased at the foreclosure sale free from all 
claims for the debts and contracts that the receiver 



REORGANIZATION OF THE RAILROAD 403 

incurred, unless a statute or an order of the court 
charges such claims against such property. 

Such statute or order of the court may make the 
debts of the receiver, or certain of them, a condition 
of the sale, by either selling the property free from 
them and charging them against the proceeds, or by 
directing that the property be sold subject to their 
lien, whereupon the purchaser takes the property 
charged with their payment so far as the property 
itself will do so, there being no liability beyond that. 
Or such statute or order of the court may declare 
that the purchaser shall assume the payment of these 
claims as part of the purchase price ; and he then be- 
comes personally liable for such debts so assumed, 
without regard to the value of the property. 

Receiver's certificates are, as a rule, made a lien, 
superior to that of the foreclosed mortgage, against 
the property and franchise to be sold, The certifi- 
cates are then paid in full out of the proceeds of 
the sale of the property before the holders of the 
bonds under the foreclosed mortgage receive any- 
thing. The court may order the property sold sub- 
ject to the lien of the certificates, whereupon the 
purchaser becomes liable for their payment to the ex- 
tent of the value of the property against which they 
are a lien. Or the property may be sold free and 
clear of the certificates, and their lien transferred to 
the proceeds of the sale. Sometimes the property is 



404 RAILROAD BONDS AND NOTES 

sold and as part of the purchase price the new cor- 
poration undertakes to pay the receiver's certificates, 
thus making them its own obhgation. 

The new corporation is not liable for damages for 
claims for injuries to persons or to property, com- 
mitted by the receiver or his employees in the opera- 
tion of the road during the receivership. 

The new corporation is not liable for any negli- 
gence in the operation of the road until it takes over 
and assumes control. Should the receiver continue 
to operate the road after the sale, at the request of 
the committee, and after title to the property has 
passed to the purchasing committee or to the corpora- 
tion it represents, then such new corporation shall be 
liable for all claims for damages to persons or prop- 
erty during that period. 



INDEX 



Abandonment of plan of reor- 
ganization after adoption, 
rights of depositors, 344, 
364-365 

Abandonment of reorganization, 
rights of parties, 343-345, 
386-387, 390-393 

Accounting, by reorganization 
committee, 378, 382 
receiver, 220-221 

Acts of trustee binding on 
bondholders, 121 

Adjournment of foreclosure 
sale, 181-182 

Adopting plan, power of reor- 
ganization committee, 373 

After acquired property clause, 
83, 85-86 

Agreement for reorganization, 
rights of bondholders to 
examine, 342-343 
synopsis of, 349-352 

Altered bonds, notes or coupons, 
30-31, 

Amount of issue, 69-72 

Ancillary receiverships, 195-197 

Appraisement laws, 184 
waiver of, 88 

Approval or rejection of plan 
for reorganization, 360- 
364 

Approval or rejection of changes 
in plan, 365-368 

Assented bonds, 325 

Assented income bonds, 334 

Assessments of stockholders, 
a form of reorganization, 

335-337 
Assents to plan for reorganiza- 
tion, 360-364 
Assignment in blank, 25 
Assumed bonds, 309-310 



Attaching creditors, 193-195 
Attachments and executions, 

253-254 
Attitude of courts, toward com- 
binations to purchase at 
foreclosure, 171 
toward railroad bonds, 62, 117 
toward receiverships, 191-192 
toward reorganizations, 340- 

342 
toward trustees, 118-119, 124 
Avoiding liability under reor- 
ganization agreement, 
386-387 



Betterments, 313 

Blank space for name of payee, 

25 
Blanket mortgage bonds, 269- 

271 
Bona fide holders, of bonds or 
notes, 23-28 

of coupons, 46 
Bond of receiver, 192-193 
Bondholders, agreements be- 
tween, 349 

bound by acts of reorganiza- 
tion committee, 385 

bound by decisions of courts, 
126-128 

consolidation affecting the 
rights of, 289-290 

depositing bonds under reor- 
ganization agreement, 351, 
386-387 

expenses of reorganization 
when paid by, 386-387 

may appear in litigation, 126- 
128, 164 

may control remedies, 147, 
164-166 



405 



4o6 



INDEX 



Bondholders — continued. 

may litigate instead of trus- 
tee, 127-129, 166 
may lose rights to set fore- 
closure sale aside, 183- 
^ 184 
option to declare principal 

sum due, 1 50-1 51 
purchasing road with bonds, 

185, 383-385 

reorganization alone or with 
other creditors or stock- 
holders, 346-349 

reorganization committee, acts 
of binding on, 385 

stockholders and, compared, 
15-16 

suing on individual holdings, 
129-131 

terms of reorganization agree- 
ment affecting, 386-387 
Bonds, accepted in payment of 
purchase, 185 

consents and permission to 
issue, 68-69 

convertible into capital stock, 
105-110 

deposited under reorganiza- 
tion, how deposited, 352- 
353 
use of, 352-353 

described, 8-1 1 

dishonor of, 42 

execution of, 13 

excess issue, 19 

form of, 72-75 

new corporation, after reor- 
ganization must issue, 
397-400 

notes and, compared, 10 

numbered, 241-243 

over-issued, 243 

purchasing road with, 383- 

.385 
registered, described, 14, 

registration of, 48-50 
reissued, exchanged, substi- 
tuted, 243-^44 
series, 240-241 
statutes of limitation, 46-48 



Bonds — continued, 
temporary, 12 

terms of, binding on bond- 
holders, 16-18 
transfer of, 13-14 
use of, to purchase road, 383- 

385 
violation of power to issue, 19 
Branch lines, financing of, 283- 
286 
receivership of, 197-198 

Calling bonds in, 98-100 
Cancellation of coupons, 38, 92- 

93, 261-262 
Car trust certificates or bonds, 

316-323 
Certificates of deposit, de- 
scribed, 353-354 
do not draw interest, 355 
surrender of, 387-390 
transfer and negotiability, 
353.-356 
Changes in agreement, 365-368 
power of committee to make, 

365-368, 370-372 
plan for reorganization, 358- 
.359, 365-368 
Classification of bonds, 21-22 
Clear bonds, 32-33 
Closed mortgages, 69-72, 239- 

241 
Collateral, direct obligation or, 
76 
mixed, 278 

trust mortgages, bonds or 
notes, 277-286 
Collection of coupons, 36-37 
Combinations to purchase at 

foreclosure, 170-172, 183 
Committee ; see Reorganization 

committee 
Compensation, of receiver, 223- 
224 
of reorganization committee, 

392, 393 
of trustee, 141-142 
Condemnation proceedings, to 
acquire right of way, 257 



INDEX 



407 



Condition of insolvent road, 5- 
7, 234-236 

Conditional sales, 255-257 

Consents and permission, to 
issue bonds and mort- 
gage, 68-69 
to receivership, 192-193, 198- 
199 

Consolidated bonds, 287 

Consolidated roads, bonds of, 
286-292 
liability for debts and con- 
tracts of constituent 
roads, 286-292 
stock of, 289 

Consolidation, bonds resulting 
from, 274-277 
conversion into capital stock, 
affected by, 107-108, 290- 
291 
how carried out, 288-289 
rights of bondholders, af- 
fected by, 289-290 

Constituent roads, bonds of, 
286-292 

Construction company, bonds 
from, 314-316 
claims for original, 250-252 
bonds for, 71 

Construing plans, power of 
committee, 370-372 

Contracts, debts of insolvent 
road, affecting new cor- 
poration, 402-404 
debts of insolvent road, in 
connection with receiver- 
ship, 203-206 

Control of bonds deposited un- 
der reorganization agree- 
ment, 352-356 

Control of subsidiary road, 
bonds resulting there- 
from, 274-277 

Conversion parity, 109 

Convertible bonds into capital 
stock, 105-110 
affected by consolidation, 107- 
108, 290-291 

Convertible collateral trust 
bonds or notes, 279 



Convertible or interchangeable 
bonds, 53-55 

Converting registered into cou- 
pon bond, 50-52 

Cooperation with other reor- 
ganizations, 372-373 

Corporation organized to take 
over insolvent road; see 
New Corporation 

Co-trustees, 122-123 

Counsel, opinion of as to bond 
and mortgage, 61-62 

Coupon bonds, converting into 
from registered bonds, 
50-52 
generally, 31-32 
transfer, 32-33 

Couponholders, relations to each 
other, 46 

Coupons, bona fide holder of, 46 
negotiable, bond registered, 

52-53 

cancellation of, 38, 92-93, 
261-262 

collection of, 36-37 

effect of payment, 38-40 

interest on, 40-42 

Invalid, 46 

meaning of word, 32 

overdue, 40-42 

payment of, 37-38 

priorities and preferences 
among, 44-46, 260-262 

registered, 53 

security for, 44-46 

severed, 34-36 

statutes of limitation, 46-48 
Court, advising receiver, 201 

advising trustee, 135 
Creditors, generally, 234-237 

on equal footing, 238 

receivership affecting, 193- 

195 
Cumulative income bonds, 330- 

331. 
Current income, 229-230, 247- 
248 

Damages to persons or prop- 
erty, 231, 260 



4o8 



INDEX 



Damage — continued. 

inflicted during receivership, 

209-210 
share in assets, 209, 231, 260 
Debenture income bonds, 330 
Debentures, described, 11-12 
sharing in assets, 262-265 
Debts and contracts of insolvent 
road in relation to new 
corporation, 402-404 
Debts and expenditures of reor- 
ganization committee, 
375-376 
Deed of trust, or mortgage, pur- 
pose of, 56 
Default, in payment, 91 
on purchase of road, 384 
under mortgage, 58 
waiver of, 152-153 
what constitutes, 148 
Defective mortgages, 66-67 

valid bonds, 66 
Defectively issued bonds, 19-20 
Delegating powers by trustee, 

123-124 
Deposit, certificates of, transfer, 

negotiability, 353-356 
Deposited bonds under reor- 
ganization, power of 
committee over, 373-374 
use of, 352-353 
Deposit on bid on foreclosure 

sale, 184-185 
Depositors' agreement, 349 
Depreciation in value of securi- 
ties deposited under mort- 
gage, 81-82 
Description of mortgaged prop- 
erty, 83-84 
Details, of receivership, 202 
of reorganization, 368-370 
of trusteeship, 134-135 
Development, bonds relating to, 

312-314 
Direct or collateral obligations, 

76 
Discharge of reorganization 

committee, 378-382 
Discretionary powers, of re- 
ceiver, 202 



Discretionary powers — cont. 
of reorganization committee, 
generally, 368-370 
with relation to plan, 360- 
361 
of trustee, 134-135 
Dishonor of bond, 40-42 
Displacing lien of prior mort- 
gage, 237-239, 246 
with lien for taxes, 254-255 
Dissents from reorganization 

^ plan, 360-364 
Distribution of proceeds, of 
operation by trustee, 156- 
157 
of sale by trustee, 114-115, 
161-162 
Dividends on stock deposited un- 
der mortgage, 78 
Divisional bonds, 292-293 
Divisions, financing of, 283-286 
foreclosing against, 169-170 
Document or papers necessary 

to trusteeship, 88-89 
Duties, of receiver while oper- 
ating the road, 200-202 
of reorganization committee, 

377-379 
of trustee, 132-134 

Effect, of foreclosure on mort- 
gages and other claims, 
178-181 

of payment of coupons, can- 
cellation, 38-40 

of receivership on existing 
rights and claims, 193- 
195 

of trustee's acts on bond- 
holders, 121 
Enforcing the mortgage, 111- 

115 
Equipment bonds, 323-324 
Equipment trust certificates or 

bonds, 316-323 
Equity of redemption, 178-180 

what it is, 401 
Excess issue, 69-72 
Exchanged bonds, 244 
in refunding, 101-105 . 



INDEX 



409 



Execution, of bonds, 13 

and attachments, 253-254 
Exemption and redemption 

laws, waiving of, 88-89 
Expenditures, and debts of re- 
organization committee, 
375-376 
by receiver, for large 
amounts, 207-209 
generally, 206-207 
by trustee, 142-144, 157-IC8 
Expenses of receivership, what 
are, 209 
of reorganization committee, 
375-376 
participating bondholders 

liable therefor, 386-387 
how paid, 393-394 
of trusteeship, 142-144, 157- 

158 
Extended bonds or notes, 327- 

328 
Extension bonds, 314 
financing of, 283-286 

Face value paid, 28-29 

Filing plan, 358-359 

Filing or recording mortgage, 

64-66 
Fire insurance of mortgaged 

property, 83-84 
First consolidated mortgage 

bonds, 287 
First lien bonds, 266-267 
First mortgage bonds, first 
mortgage consolidated 
bonds, first mortgage col- 
lateral trust bonds, 267- 
269 
Foreclosure, 146-147 
bondholders instead of trus- 
tee may bring, 164-166 
control by bondholders, 164- 

^ 166 
divisional mortgages, 169-170 
for interest only, 168 
lease instead of, 168-169 
minority may demand, 164 
postponing, provisions for, 
148-150 



Foreclosure — continued. 

procedure, outline of, 162- 

163 
sale under, 167-170 
trustee prefers to bring, 185- 
186, 164-166 
Form of bond, 72-75 
Form of trustee's certificate, 75 
Franchise, to exist as a cor- 
poration, 61, 173-174, 
395-396 
to operate a road, 173-174, 
395-396 
power to mortgage same, 
59-62 
Fraud, in combination to pur- 
chase at foreclosure, 183 
in foreclosure sale, 182-184 
in issue of bonds, 24 
Fund realized from sale by 
trustee, 114-115 

General mortgage bonds, 269- 

271 
General or unsecured claims, 
affected by consolidation, 
288 
affected by reorganization, 

178-180 
share in assets, 227-229 
Gold coin, payment in, 91 
Good delivery, 14 
Good faith, of purchaser of 
bonds and coupons, 23- 
28, 46 
of reorganization committee, 

361 
of trustee, 118 
Guaranteed bonds, 293-308 
Guaranteed by endorsement, 
294 

Improvement or development 

bonds, 313 
Income, anticipating same, 209- 
210 
bonds, 329-334 
current, 229-230 
mortgaged, 229 
net, 230 



410 



INDEX 



Income — continued. 

of road before default, 229- 

231, 83-84 
earned during operation, by- 
receiver, 209-210, 229-231 
by trustee, 156, 231-234 
Indemnity to trustee, 120, 127, 

. 147, 155,. 159, 160 
Individual holdings, suits there- 
on, 129-13 1 
Individual interest, of reorgani- 
zation committee in prop- 
erty, 376-377 
of trustee in property, 124- 

125 
Injunction, against reorganiza- 
tion committee, 379-382 
stopping foreclosure sale, 

182-184 
against trustee, 121 
Injuries to persons or property, 
231, 260 
caused during receivership, 

209-210 
sharing in assets, 209-210, 
231, 260 
Insolvency of road, situation 
presented by, 5-6, 234- 
236 
Instructions to receiver, 199- 
201 
to reorganization committee, 

377-379 

to trustee, 135-137 
Insurance of mortgaged prop- 
erty against fire, 82-83 
Interchangeable or convertible 

bonds, 53-55 
Interest, bonds deposited under 
mortgage, 78 

bonds deposited under reor- 
ganization, 353-356 

certificates of deposit, not 
payable on, 355 

during foreclosure, 45, 209 

foreclosure for, 168 

overdue coupons, 42-44 

priorities among claims for, 
260-262 

registered bonds, 52 



Intrinsic value of railroad se- 
curities, 2-4 
Invalid bonds, 18 
Invalid coupons, 46 

Joining in reorganization, rights 
of bondholders, 343-346 

Judgments, 258-259 ; and execu- 
tions, 253-254 

Leased lines affected by re- 
ceivership, 203-206 
Leases of rolling stock, aifected 
by receivership, 203-206 
Leasing of road, bonds resulting 
therefrom, 274-277 
by trustee, 154-156 
instead of foreclosure, 168- 
169 
Legal value of railroad securi- 

_ ties, 4-7 
Liabilities and rights of trus- 
tees, generally, 89-90 
Liability, for co-trustees, 122- 
123 
of receivers, official and per- 
sonal, 219-220 
of reorganization committee, 
to bondholders, 379-382 
for co-members, 281-282 
to third persons, 379-382 
of sureties on receiver's bond, 

220 
of trustee for acts of rep- 
resentatives, 119; acts of 
employees, 159 
to bondholders, 119 
to third persons, 120 
relieved by mortgage, from, 

119 
relieved by statute, from, 
159-160 
under reorganization agree- 
ment, depositors avoid- 
ing, 386-387 
Lien, first lien bonds, 266-269 
mortgage gives, 62-64 
mortgage gives is preserved, 
86-87 



INDEX 



411 



Lien — continued. 

of prior mortgage displaced, 
238-239, 246; by taxes, 
254-255 
Liens, affected by receivership, 
193-195 
discussed, 62-63 
of mechanics, 252-253 
on property sold, 176-177 
prior and later, how affected 

by foreclosure, 178-180 
sharing in assets, 227-229 
underlying, 271-272 
Limitations, on amount of issue, 
69-72 
on liability of reorganization 

committee, 379-382 
on liability of trustee by 
mortgage, 119, by statute, 
159-160 
statutes of, 46-48 
Litigation, bondholders may ap- 
pear in, 126-127 
by bondholders instead of 

trustee, 127, 129 
trustee usually conducts, 126- 
128 
Losing rights, against trustee, 
119-120, 124-125 
rights to set aside foreclosure 
sale, 183-184 
Lost coupon bonds or notes, or 

coupons, 28-38 
Lost registered bonds, 48-49 

Majority, advising trustee, 125- 

137 
declaring for foreclosure, 

164-166 
changes in mortgage by, 17 
changes in plan by, 365-368 
reorganization by, 344 
rights to declare remedies to 

be pursued, 113 
rights on approval or rejec- 
tion of plan, 360-364 
waiving defaults, 17-18, 152- 

hens, 326 



Management and operation, by 
receiver, outline of, 187- 
188 

by trustee, outline of, 146- 
147, 154-160 
Marked bonds, 14, 32-33 
Market value of railroad securi- 
ties, I 
Mechanics' liens, 252-253 
Merger, bonds resulting there- 
from, 274-277 
Minority, changes in plan by 
maj.ority, rights of, 365- 
368 

foreclosure may be forced by, 
164 

majority advising trustee, 
rights of, 135-137 

majority declaring for fore- 
closure, 164-166 

reorganization by majority 
against objections of, 343- 
346 

remedies of, 113 

rights of on approval or re- 
jection of plan, 360 

trustee advised by majority, 
rights of, 135-137 

trustee forced to act by, 165 
Mortgage, affected by receiver- 
ship, 193-195 

closed, 69-72, 239-241 

consents thereto, 68-69 

consolidated bonds, 267-269 

conveys property to trustee as 
security, 97 

deed of trust or, 56 

defective, 67 
valid bonds, 66 

description of, 57-59 

displacing lien of, 180, 238- 
239, 246, 254-255 

effect of, 58 

franchise to operate included 
in, 59-62 

Income bonds, 320 

later, affected by foreclosure, 
178-180 

lien, 62-64 

lien displaced, 180, 238-239 



412 



INDEX 



Mortgage, lien displaced — con- 
tinued, 
by operating expenses, 246 
by taxes, 254-255 
by receiver's certificates, 
180, 210-219 
meaning of word, 80 
open, open-end, 69-72, 240- 

241 
parties thereto, 68 
power of company to make, 
59-61 
opinion of counsel, 62 
pledge, compared with, 79-80 
purposes of, 56, 68 
purchase money, 255-257 
recording of, 64-66 
remedies to enforce, 111-115 
successive, 238-239 
synopsis of, 67 

terms of binding on bond- 
holders, 16-18 
trust bonds, 267-269, 278 
valid, bonds void, 67 
void, 67 

aifecting bonds, 20 
bonds valid, 66 
Mortgaged property, described, 

83-84 
usually includes the franchise 

to operate, 59-62 
insurance against fire, 82-83 
possession by railroad com- 
pany, 78-82 
Mutilated bonds, notes, or cou- 
pons, 30-31 



Negotiability of bonds, 23-28 
Net income, 84, 230 
New charter, a form of reor- 
ganization, 335 
New corporation, after reor- 
ganization, 394-395 
assuming payment of receiv- 
ers' certificates, 403-404 
bound to issue stock, bonds, 

etc., 397-400 
damages caused during or 
prior to receivership, 404 



New corporation — continued, 
debts and contracts of in- 
solvent road, 176-177, 
402-404 
taking over purchased road, 
400-402 
New management, a form of re- 
organization, 338 
New mortgage before prior 
mortgage bonds out, 245 
Notes and bonds, compared, 11 
described, 10 

sharing in assets, 262-265 
Notice, of filing reorganization 
plan, 358-359 
of foreclosure sale, 181-182 
Non-cumulative income bonds, 

330-331 
Numbered bonds, 25, 241-243 

Obligations, direct or col- 
lateral, 76 

Official liability of receiver, 
219-220 

Open-end mortgage, open mort- 
gage, 69-72, 240, 241 

Operating expenses, may dis- 
place lien of mortgage, 
180, 245-250 
sharing in assets, 230-231 

Operation of road by trustee, 
146-147, 154-160 
control by bondholders, 155 

Opinion of counsel as to bond 
and mortgage, 61-62 

Option of bondholders to de- 
clare principal due, 150- 

151 
Original construction, claims 

for, 250-252 
Outline of foreclosure pro- 
cedure, 162-163 
of receivership, 187-188 
of reorganization procedure, 
338-340 
Overdue coupons, affecting 
bonds, 40-42 
interest thereon, 42-44 
Overissued bonds, 19-20, 243 
protection against, 69 



INDEX 



413 



Ownership of bonds, presump- 
tion of, 33-34 

Paid coupons, cancellation of, 

92-93 
Papers or documents necessary 

for trusteeship, 88 
Participating bonds, 279-280 
Participation in reorganization, 

rights of bondholders, 

342-343 
Parties, to mortgage, 68 

to reorganization liable for 
expenses, 386-387 
Payment, of bond and interest, 
no reduction for taxes, 
etc., 91 
in gold coin, 91 
of coupons, 37-38 
effect of, 38-40 
or interest during fore- 
closure, 45 
of interest on registered 
bonds, 50-52 
Penalty as condition for extend- 
ing time to participate in 
reorganization, 351-352 
Personal injuries, claims for, 

209-210, 231, 260 
Personal interest, of reorgan- 
ization committee in 
property, 376-377 
of trustee in property, 124- 
125 . _ 
Personal liability, of receiver, 
219-220 
of reorganization committee, 

379-382 
of trustee, 119-120, 159-160 
Personnel of reorganization 

committee, 376 
Persons who may purchase at 

foreclosure, 172-173 
Place of foreclosure sale, 181- 

182 
Plan for reorganization, aban- 
doning same after adop- 
tion, 364-365 
construed, changed, etc., by 
committee, 370-372 



Plan for reorganization — cont. 
filing of, 358-359 
how formulated and ^b- 

mitted, 360-364 
right to examine, 358-359 
submitting same for assent or 

dissent, 360-364 
synopsis of, 356-358 
when it takes effect, 364-365 
Pledge and mortgage compared, 

79-80 
Possession, and operation of 
road by trustee, 146-147, 
154-160 
controlled by bondholders, 

155 
of mortgaged property by 
railroad company, 78- 
82 
of securities deposited under 
mortgage,_ 78 

Postponing action under the 
mortgage, 111-112, 148- 
150 

Powers, of railroad company to 

issue bonds or notes, 8-9 

controlled by commissions, 

charter, consents, etc., 9- 

10, 68 

of receiver, generally, when 

operating road, 200-202 
of reorganization committee, 

368-370 
of trustee, general scope of, 
89-90, 131-132 

Preferences given receiver's 
certificates, 210-219 

Preferences given receiver's ex- 
penses, 209 

Preferences given reorganiza- 
tion committee's expenses, 
375-376^ 

Preferences given trustee's ex- 
penses, 158 

Preferential bonds, 326-327 

Preferred, stock, 254 
stockholders, 16 

Preparing plan, powers of re- 
organization committee, 
370^372 



414 



INDEX 



Preserving lien of mortgage, 86- 

87 
Preventing foreclosure sale, 

182-184 
Principal of bonds, may fall 
due on default of inter- 
est, 150-151 
only registered, coupons nego- 
tiable, 52-53 
Priorities, among coupons, 44- 
46, 260-262 
between principal and inter- 
est, 92, 260-262 
waiving of, 238-239 
what is meant by, 236 
Prior lien bonds, 326-327 
Proceeds of sale by trustee, how 

distributed, 161-162 
Profit sharing bonds, 279-280 
Property, after acquired clause, 
85-86 
conveyed to trustee by mort- 
gage, 77 
damages to, claims for, 209- 

210, 260 
reorganization committee ac- 

quiring,^ 374-375. 
sale of, subject to prior liens, 

176-177 
taken over by new corpora- 
tion, 400-402 
that is usually mortgaged, 83- 
84 
Purchase, money mortgage, 255- 
257 ^ ^ 

of road by reorganization 
committee or bond- 
holders, 383-385 
of trust property, by reorgani- 
zation committee, 376-377 
by trustee, 124-125 
Purchasers, certain, barred at 
foreclosure, 172-173 
default of in completing pur- 
chase, 384 
foreclosure sale, rights of, 

173-175 
liability of, for debts and con- 
tracts of insolvent road, 
176-177 



Purchasers — continued. 

liability of, for debts and con- 
tracts and certificates of 
receiver, 177-178 
taking property subject to 
liens, 176-177 
Purpose of mortgage, 68 

Qualifications, of receiver, 198 

of trustee, n8, 141 
Quasi-public corporation, 60-61, 
248 



Reasons for trusteeship, 117- 

118 
Receiver, accounting by, 220- 

221 
advised by court, 201 
compensation of, 223-224 
compromising or settling 

claims, 201 
contracts of insolvent road, 

including leases, car trust 

agreements, affecting the, 

203-206 
controlled bv court, 199-200 
discretionary powers of, 202 
expenditures by, generally, 

206-207 
for large sums, 207-209 
operating the road, powers 

and duties, 200-202 
qualifications, 198-199 
removal of, 221-223 
represents the court, 199-200 
suits against, 193-195 
unusual contracts by, 207-209 
unauthorized acts of, 201 
when appointed, 188-191 
who are chosen, 198-199 
Receiver's bond, 192-193 
Receiver's certificates, 210-219 
assumed by new corporation, 

403-404 
may displace lien of mort- 
gage, 180, 210-219 
reorganization committee may 

consent to, 376 



INDEX 



415 



Receivership, agreement of rail- 
road company with rela- 
tion to, 1 1 2-1 1 3 

ancillary, 195-197 

attitude of courts toward, 
191-192 

branch or subsidiary line, 197- 
198 

consents of parties in in- 
terest, 192-193, 88-89 

generally, 187-188 

effect of, on existing liens, 

193-195 

expenses of, what constitutes, 
209 

grounds therefor, 188-191 

income during, 209-210 

parent company, 197-198 

subsidiary company, 197-198 

termination of, 224-225 
Recording or filing of mortgage, 

64-66 
Redemption, and exemption 
laws, waiving of, 88-89 

by railroad company, 153 

equity of, 178-180 
Redeeming bonds, 98-100 
Refunding, bonds, 101-105 

mortgage bonds, 272-274 

plans, 101-105 
Registered bonds, 14, 48-50 

converting coupon bond into, 
50-52 

interest on, 52 

as to principal only, 52-53 

transfer of, 14, 50-62 
Registered coupons, 53 
Registration, act of, 49 

of certificates of deposit, 354- 

355 
effect of, 48-49 
Reissued bonds, 243-244 
Rejection, of changes in reor- 
ganization plan, 365-368 
of reorganization plan, 360- 

.364 
Relation between bondholders 

and trustee, generally, 

116-117 
Removal of receiver, 221-223 



Removal of trustee, 137-139 
Replacing mortgaged parts, 81 
Replacing securities deposited 

under mortgage, 81-82 
Remedies, of bondholders 

against trustee, 121-125 
to enforce mortgage, iii- 

115 

trustee pursues, 132-134 
Rentals received by trustee, 

161 
Reorganization agreement, rights 
of bondholders to ex- 
amine, 342-343 

synopsis of, 349-352 

termination of, 390-393 
Reorganization, bondholders 
right to participate in, 
generally, 342-346 

bondholders right to refuse 
to participate in, 343 

by bondholders alone or with 
other creditors, stock- 
holders, 346-349 

bonds growing out of, 324- 

325 
different forms of, 335-338 
expenses of, how paid, 393- 

394 

financing of, 339-340 

majority against objections of 
minority, 343-346 

must be fair, 340-342 

plan, synopsis of, 356-358 

procedure, outline of, 338- 
340 

time within which it must be 
completed or deposited 
securities returned, 377- 
379 
Reorganization committee, ac- 
counting and discharge, 
378, 382 

bondholders bound by acts of, 
385 

changing mortgage, 17 

changing plan or agreement, 
365-368 

compensation of, may be for- 
feited, 392 



4i6 



INDEX 



Reorganization committee — cont. 
discretionary powers with re- 
lation to plan, 360-361 
duties of, general scope, 377- 

379 
expenditures, expenses and 

debts, 375-376 
good faith of, 361 
personal interest in property, 

376-377 
personal liability, 379-382 
personnel of, 375 
plan, abandoning same, 364- 

365 . 
declaring same operative, 

discretionary powers with 
relation to, 360-361 
powers of, general scope of, 
368-370 
over deposited bonds, 373- 

374 
to construe, remedy, change, 

prepare, adopt, declare 

operative, abandon plan, 

370-372 
purchasing road, 383-385 
purchasing with own money, 

384 
prior liens paid by, 375 
property acquired by, 374- 

375 
receivers certificates, consent- 
ing to, 218 
remedies of bondholders, pur- 
sued by, 374 
representatives may be em- 
ployed by, 370 
waiving defaults, 17-18 
Repairs to mortgaged property, 
company agrees to make, 
80-82 
Repossession by railroad com- 
pany, iio-iii, 153 
Resale of road under reorgan- 
ization, 386 
Residence of railroad company, 

17 
Resignation, by receiver, 221- 
223 



Resignation — continued. 

by reorganization committee, 

376 
by trustee, 1 39-141 
Return of securities upon ter- 
mination of reorganiza- 
, tion, 387-390 
Right of way claims, 257-258 
Rights, liabilities of trustee, 89- 

90 
Rolling stock, what it is, 204 
lease of, 203-204 
car trust agreements cover- 
ing, 205-206, 316-323 
Rules for distribution of assets, 
227-229 



Sale, by trustee, details of, 161- 
162 
proceeds of, 114-115 
control by bondholders, 160- 

162 
notice of, 181-182 
stopping, preventing or set- 
ting aside, 182-184 
subject to liens, 176-177 
terms of, 184-185 
under foreclosure, 167-170 
conditional, 255-257 
or lease of property, a form 
of reorganization, 335 
Scaling, 328-329 

form of reorganization, 337- 
338 
Second mortgage bonds, 267- 

269 
Secured and unsecured creditors, 
sharing in assets, 227- 
229 
Securities of new corporation, 
after reorganization, 397- 
400 
Security for coupons, 44-46 
Selection of trustee, 131-132 
Serial bonds, loo-ioi, 243 
Serial numbers, 25, 241-243 

alteration of, 30-31 
Series, bonds in, 100-101, 240- 
241, 243 



INDEX 



417 



Setting aside foreclosure sale, 

182-184 
Several coupons, 34-36 
Sinking fund arrangements, 93- 

98 
Stamped bonds, 308-309 
Stock, of consolidated company, 
289 
of new corporation, after re- 
organization, must be is- 
sued, 397-400 
Stockholders, becoming such 
upon conversion of bonds 
into stock, 105-110 
bondholders and, compared, 

15-16 
consents of to mortgage, 68-69 
interests of in assets of road, 

. . .15 . 

joining in reorganization, 

372-373 
reorganization by, with bond- 
holders or other creditors, 

346-349 
rights of in insolvent road, 

346-349 
terms upon which they may 

join reorganization, 346- 

349 

Stolen coupon bonds or notes, or 
coupons, 28-30 

Stolen registered bonds, 48 

Stopping foreclosure sale, 182- 
184 

Straw bidding, 184-185 

Submitting plans for assents or 
dissents, 360-364 

Surrendering certificates of de- 
posit upon withdrawal 
from reorganization, 387- 
390 

Subsidiary roads, control of, 
bonds resulting from, 
274-277 
financing of, 283-286 
receivership of, 197-198 

Succession by continuing trus- 
tee, 123 

Suits, against receiver, 193-195 
on detached coupons, 35 



Sureties on receiver's bond, 193 

liability of, 220 
Synopsis of mortgage, 67-115, 
general description, 57-59 
of reorganization agree- 
ment, 349-352 
of reorganization plan, 356- 
358 



Taxes, lien thereof may displace 
that of mortgage, 180, 

254-255 
no reduction from bond or in- 
terest, 91 
Temporary bonds, 12-13 
Terminal bonds, 310-312 
Termination, of receivership, 
224-225 
of reorganization agreement, 

390-393 
Terms of foreclosure sale, 184- 

185 
Third mortgage bonds, 267-269 
Three usual remedies to enforce 
mortgage, 133-134, 146- 
147 
Time, of foreclosure sale, 181- 
182 
within which assents or dis- 
sents from plan must be 
filed, 371-372^ 
within which parties may join 
reorganization, 351, 372 
penalty, 352 
within which new corpora- 
tion, after reorganization, 
shall issue securities, 
397-400 
within which reorganization 
must be completed or de- 
posited securities re- 
turned, 377-379, 387-390 
Transfer, of bonds, generally, 

13714 
of certificates of deposit, 354 
of coupons, 32-34 
of registered bonds, 50-52 
Transferring lien to proceeds of 

sale, 176-178 



4i8 



INDEX 



Trust bonds, first mortgage, 

267-269 
Trustee, advised by court, by 
majority bondholders, by 
legal counsel, 135-137 
changing mortgage, 17 
compensation of, 141-143 
discretionary powers of, 134- 

135,. 154 
distribution by of proceeds of 
operation of road, 156- 

.157 
duties of, generally, 132-134 

expenses of, 142-144, 157- 

158 
forecloses usually, 164-166 
foreclosure preferred by, 185- 

186 

indemnity for, 155, 159, 

160 
liability of, to bondholders, 

155 
to third persons, 155 
liability, relieved from, by 

statute, 159-160; by 

mortgage, 119 
losing right to litigate, 127- 

128 
minority may direct, 165 
powers of, general scope, 131- 

132 
purchasing at foreclosure, 

when permitted, 172-173 
qualifications of, 147 
remedies of, 132-134 
removal of, 137-139 
resignation of, 1 39-141 
rights and liabilities of, 89- 

90 
selling property to satisfy 

mortgage, 160-162 
selection of, 131-132 
waiving defaults, 17-18, 112, 

. 152-153 
waiving rights of bondhold- 
ers, 239 
who is fchosen, 118 
Trustee's certificate, check on 
overissue, 70 
forgery of, 24 



Trustee's certificate— continued. 

form of, 75 

generally, 90 
Trusteeship created by mort- 
gage, 77 

reasons therefor, 177 

Underlying liens, 271-272 
Unification, unifying bonds, 270 
Unsecured and secured cred- 
itors, 227-229 
Unsecured bonds, see Deben- 
tures 
Unsecured claims, affected by 
foreclosure, 178-180 
shares in assets, 227-229 
Unsecured creditors, of con- 
stituent companies af- 
fected by consolidated 
mortgage, 288 
protected in reorganization, 

346-349 
Unusual contracts of receiver, 

207-209 
Upset price, 184 

Vacancies In trusteeship, 139- 

141 
Valid bonds, void mortgage, 66 
Valid mortgage, void bonds, 66 
Validity of bonds, 18 
Valuation laws, waiving of, 88 
Value of railroad securities, i 
intrinsic value, 2-4 
legal value, 4-7 
market value, i 
Variation, between bond and 
coupon, 36 
between bond and mortgage, 
18 
Void bonds, 18-20 
Void mortgage, 17 
Voting power of stock deposited 

under mortgage, 78 
Voting trust, 399-400 

Waiving, defaults, 17-18, 112, 

152-153 
lien, a form of reorganiza- 
tion, 336-339 



INDEX 419 

Waiving — continued. Withdrawing, from agreement 

or losing rights against trus- of reorganization, 387- 

tee, 124-125, 1 19-120 390 

priorities, 238-239 from reorganization, upon 

redemption and exemption changes in plan, 367 

laws, 88-89 









'^m 




.^^^■iii^ 





